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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
PuneshWe use the effective rate because that is the “true” finance cost
We deduct the interest paid because the calculation works like this:
Loan brought forward
Calculate interest at effective rate
Deduct actual interest paid
Add the difference between effective rate less actual amount paid to the figure brought forward
That increased amount is then the new carried forward figure
Does that help?
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