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What does effective interest represents and why do you have to debit a financial assets with the amount of the effective and interest before we credit in with the amount actually paid.
Because the asset is undervalued on original acquisition and effective ( market / realistic ) interest is greater than the issued / declared rate. So, add the effective rate onto the asset and then deduct amount actually received. Thus, over the period to maturity, the carrying value of the asset increases by the difference between effective rate and declared rate
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