Hi Sir,
A Company issued a $100m loan stock at par. The loan has a 5 year term and will be repaid at a premium of $20m. The question is that I have to assess the risk of material misstatement.
The BPP ans said that the premium of $20 should be recognised as a finance cost over the period of the loan using the amortisation method.
I know that this should be accounted for with amortisation method, however isn’t the calculation of amortisation method to debit the interest rate and credit the loan with the effective interest rate? So you won’t be accounting for the $20m over the period but only when it will be paid?
Ask the Tutor ACCA AAA
June 12 - Financial Instruments
7y ago#1What you are writing is contradictory. The amortisation method means that the co will:
Dr Finance cost/interest expense (calculated using effective interest rate)
Cr Loan liability
each year so that the sum of the Drs over the period of the loan = $20m.
The whole point of this method is that it DOES account for the interest over the period.
Sign into reply to this topic.