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I couldn't reply to the topic below, so made a new topic

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › I couldn't reply to the topic below, so made a new topic

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by MikeLittle.
Viewing 2 posts - 1 through 2 (of 2 total)
  • Author
    Posts
  • April 20, 2017 at 10:10 am #382810
    richard
    Member
    • Topics: 11
    • Replies: 6
    • ☆

    Recap

    I have another question that i am getting confused with.

    Lucindy issue a debt instrument on 1 Jan X4 at its nominal value of $4,000,000. The instrument carries a fixed coupon interest rate of 6%, which is payable annually in arrears.
    Transaction costs associated with the issue were $200,000. The effective interest rate applicable to this instrument has been calculated at approximately 8.4%.

    What are the amounts that should be recorded as the opening liability on 1 Jan X4 and the finance cost in the P & L for year ended 31 Dec X4?

    Here i have a feeling i have worked it out the wrong way round.

    Opening liability = 4,000,000 – 200,000 = 3,800,000

    Finance Cost = 3,800,000 * 8.4% = 319,200
    I think i answered correctly if Lucindy has invested rather than being the issuer.

    So would the opening Liability be the 4,000,000 (and ignore the transaction costs for the liability)
    Finance cost = (4,000,000* 6%) = 240

    April 20, 2017 at 7:24 am
    Profile photo of MikeLittle
    MikeLittle

    Keymaster
    No, I believe that your answer is correct

    OK?

    Sorry I didn’t understand your reply. Are you saying i was correct with my answer;

    1) Opening liability = 4,000,000 – 200,000 = 3,800,000
    Finance Cost = 3,800,000 * 8.4% = 319,200

    2) Opening Liability be the 4,000,000 (and ignore the transaction costs for the liability)
    Finance cost = (4,000,000* 6%) = 240

    I cannot find how to record if when a company issues Debt instrument, unless I am not understanding the question fully?

    April 20, 2017 at 10:45 am #382812
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23309
    • ☆☆☆☆☆

    This part of your previous post was what I was referring to when I said that I believed that it was correct:

    “Opening liability = 4,000,000 – 200,000 = 3,800,000

    Finance Cost = 3,800,000 * 8.4% = 319,200”

    Double entry for recording a debt instrument:

    Dr Cash 4,000,000
    Cr Liability 4,000,000

    Dr Liability 200,000
    Cr Cash 200,000

    Paying interest at 6%

    Dr Finance charges 240,000
    Cr Cash 240,000

    Accounting for effective interest

    Dr Finance charges 79,200 ((3,800,000 @8.4%) – 240,000))
    Cr Liability 79,200

    Better?

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    Posts
Viewing 2 posts - 1 through 2 (of 2 total)
  • The topic ‘I couldn't reply to the topic below, so made a new topic’ is closed to new replies.

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