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HUMMINGs co . March / June 2020
In the requirement D of the ques , bonds were measured at $10 m at 31 dec x3 . but there was a loss allowance of $10000 , so wouldn’t the carrying value of the bond be adjusted to $9.99m ?
Also for calculation of effective interest at end of 31 dec x4 , it should be $9.99 m *8% = $ 0.7992m
I always thought that effective interest is calculated at net carrying value ( ie taking consideration of loss allowance )
Please guide .. Thankyou(On future posts please show topic not question name as the title. If you want to reply this set up a post with a header EFFECTIVE INTEREST)
Until you get to stage 3 (no chance of getting paid very much), the company will keep 2 ledger accounts – loan asset and allowance for bad debt. The 2 balances are then offset in the FS.
Effective interest will be calculated using the IRR on the GROSS amount (the loan asset account with a debit balance).
After stage 3 the 2 ledger accounts will become one, showing the NET balance and interest will be calculated on this net amount.
PS Trusting that you have watched my debrief of this question. 🙂
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