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Hello,
At around 6.30 minutes you minus the initial incurred costs of 100,000 from the initial measurement on the debenture of 2,000,000 leaving 1,900,000.My question is what exactly happens to the initial issue costs of 100,000?
And what are the journal entries for them?
Also why is the coupon rate of 2% based on the 2,000,000, and not the 1,900,000?Thanks
Hi,
Financial instruments are always tricky and what you mention are common issues found by students, so you’re not alone!
With the costs we pay them and so we would CR Bank with the 100,000. The other side of the entry is taken to the financial instrument. If it is a financial asset then the DR would increase the financial asset but if it is a financial liability then the DR would reduce the value of the financial liability, as it has done here.
The coupon interest payment is based upon the legal rules, and not the accounting rules devised above. The annual coupon interest is always calculated as the coupon interest rate attached to the instrument multiplied by the par value. In this instance the 2,000,000 is the par value of the instrument. The 1,900,000 is the value based on our accounting treatment for the issue costs and is not the par value.
Hope that helps clear up the confusion.
Thanks
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