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Hi Mike,
Please can you do a lecture on Amortisation Costs Financial assets. I have seen a few lectures but I am not very clear. For example I have a question from BPP course notesFinancial asset held at amortised cost
A company purchases a deep discount bond with a par value of $500,000 on 1.1.X1 for proceeds
of $440,000 with the intention of holding it until the redemption value is received. Annual coupon
payments of 5% are payable on 31 December. The entity incurred transaction costs of $5,867.
The bond will be redeemed on 31.12.20X3 at par.
The effective interest rate on the bond has been calculated at 9.3%.
Required
Show the profit or loss impact and carrying amount of the bond for each of the years of the bond’s
life. (20X1 – 20X3).My question is why do we need use the Effective Interest to calculate the interest to put in the P/L account and secondly why do we have to subtract the interest from coupon rate.
Regards
PuneshIf you want the tutor (in this case Mike)
to answer a question you should really use the ask the tutor forum.These are checked on a regular basis by tutors.This forum is designed for students to help one another.
In order to answer this type of question you have to construct a table showing calculations showing the way the interest unwinds.The reason the effective interest rate is used in these type of calculations is because it more accurately reflects the economic substance of transaction in question.The coupon rate would be deducted because ,I believe,this would represent the paying back of the loan by the other party.It is essentially a mirror image of the calculation carried out involving a financial liability.I would,however, confirm this with the tutor.
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