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Hi, In BPP kit, Question 39, Note 3 – Retained earnings, Area – Convertible bonds, i really don’t understand why the adjustment made on Glove is (2.3 – 1.8), this mean the “Coupon interest paid” is taken as gain on Glove’ P&L?
I thought “Coupon interest paid” should be treated as Dr Loan Cr Cash –> only hit to B/S not to PLThanks.
Hi,
This is building on the correction of errors that you’ve seen in F3 but obviously examining it using a much more complex scenario.
What the company has done is expense the interest of $1,800,000 using the coupon rate of 6%, when any interest should be based on the effective rate of 8%. The calculations show that interest of $2,276,000 should have been charged, so the adjustment in the retained earning is just showing the additional interest that needs to be expensed, i.e. 2,276,000 less 1,800,000. They’ve just rounded the 2,276,000 to 2.3
Thanks
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