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CHAPTER 27

EFFECTIVE INTEREST METHOD

Suggested Answer:
Introduction
 PFRS 9, requires bond discounts and
bond premium shall be amortized using
effective Interest Method.
 Two kinds of Interest Rate
 Nominal Rate- also known as
coupon rate or stated rate
appearing on the face of the
bond.
 Effective Rate- also known as
CA= 1,900,500- this is the acquisition price and
yield rate or market rate. This is
frequently in accounrting for bonds, this
the actual rate which the
becomes the coriginal carrying amount
bondholder earns during the
bond investment. This is also
Interest Received+ Face Amount x Nominal
the rate that discounts future
Rate
cash payment through the
=2,000,000 x 8%=160,000
expected life of bond.
 Effective Rate Vs. Nominal Rate
Interest Income= CA x Effective Rate
Effective Nominal =1,900,500 x 10%= 190,050
Rate Rate
Bond is at Lower Higher Discount on Amortization= Int. Inc- Int Rec.
Premium. =190,050-160,0000=30,050
The rate is
Bond is at Higher Lower Current Carrying Amount= Preceeding CA+
discount, Discount Amortization
the rate is = 1,900,500+30,050= 1,930,550
Illustrative Problem #1 Journal Entry
EIM- Discount
On January 1, 2017 Charisma company
purchased bonds with face value of 2,000,000
for 1,900,500 including transaction cost of
100,500 to be held as financial assets at
amortized cost.

The bonds matures on Dec 31, 2019 and pay


interest of 8% annually every Dec 31 with a
10% effective yield
CHAPTER 27
EFFECTIVE INTEREST METHOD

Accounting for Bond Premium


- The process is similar with accounting
for bond discounts. However it differs
on the computational part, The
difference is the carrying amount; in
discount; CA is increasing, in premium
CA is decreasing,
- Therefore, to get CA in Discount, you
have to add Preceeding CA and
Discount Amortization, In Premium,
you have to deduct Preceeding CA to
Premium Amortization,

Accounting for Serial Bonds


- The process is similar to the previous
one, but the key difference is, this time
it is a serial bonds, which means that the
payment is held on installments, The
effective interest method or table should
be added a column for Principal
Payment, this is the amount to be paid
annually,
- To get Carrying Amount= Preceeding
CA- Principal Payment- Premium
Amort/ + Discount Amortization.
- The other are still the same manner of
computation.