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Hey Sir Mike,
Thank you for the efforts you are putting through to see all of us pass this F7 paper.
I am encountering some problems with the following question>On 1st January 2001 Penfold purchased a debt instrument for its fair value of $500000. it had a principal amount of $550000 and was due to mature in five years. The debt instrument carries a fixed interest of 6% paid annually in arrears and has an effective interest rate of 8%. it is held at amortised cost.
Q. At what amount will the debt instrument be shown in the statement of financial position of Penfold as at 31 December 2002Once more thank you so much for your efforts
8% x 550,000 is 44,000
6% x 550,000 is 33,000
The true interest charge is 44,000 and should be debited to profit or loss
The amount of interest paid is 33,000 and is debited as part of the above 44,000 and credited to cash. The other 11,000? What to do? It’s part of the 44,000 debited to profit or loss and the credit goes to the loan account, building that account up from 500,000 carrying value to 550,000 redemption value over the period until redemption date
Ok?
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