- This topic has 1 reply, 2 voices, and was last updated 2 years ago by
.
- Posts
On 1 July 20X7, an entity purchased a five-year loan note investment with a par value of $7m. The investment was purchased at a 12% discount. The loan note has a coupon rate of 5% and an effective interest rate of 7%. Interest is receivable annually in arrears. The entity has the intention of holding the loan note to receive the contractual cash flows.
How much finance income should be reported in the statement of profit or loss of the entity for the year ended 30 June 20X9 (to the nearest $000)?
Answer :- Answer is 431200
why is it not $436884
Hi,
The answer is correct as we initially recognise the investment at what we paid as this is the fair value. This would be the $7m less the 12% discount, giving $6.16m.
We then treat it under amortised cost so will apply the effective rate of interest at 7%. This increases the investment value with the other side of the entry being the $431,200 investment income.
Thanks
- You must be logged in to reply to this topic.