ACCA FR · Chapter 7 · Question 2 of 10
On 1 January Pipit Co issued loan notes with a nominal value of $5,000,000 and received net proceeds of $4,800,000. The coupon is 4% a year, paid on 31 December, and the effective interest rate is 6%. The notes are carried at amortised cost. What is the carrying amount of the liability at 31 December of the first year?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) $4,888,000
Explanation
Amortised cost: opening $4,800,000 + finance cost at the effective rate ($4,800,000 x 6% = $288,000) - coupon paid ($5,000,000 x 4% = $200,000) = $4,888,000. The liability increases towards the redemption amount as the discount and issue costs are charged through the effective interest rate.
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