Question Tag: Effective Interest Rate

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CR – May 2019 – L3 – Q3 – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Discuss the classification of financial assets under IFRS 9 and evaluate the appropriate accounting treatment of a loan granted to a special purpose entity.

Question

Ariba Bank Plc. (the Bank) is a Tier 1 Bank in Nigeria with branch network across all the six geo-political zones of the country. Its credit portfolio is spread among many industries with a special focus on the oil and gas industry and real estate.

One of its major customers with a very good credit standing is Dunga Property Development Company (DPDC).

The management of DPDC recently approved a plan to build four shopping malls in major cities across the country. A special purpose entity was registered as a limited liability company, Dunga Malls Limited (DML), dedicated to the development and management of the malls. The project will be solely financed by a loan to be obtained from Ariba Bank. There will be no equity contribution from DPDC other than the minimum required by law to establish a company.

Ariba Bank has approved a loan of N80 billion at a fixed interest rate of 15% per annum payable annually in arrears. The loan has a maturity of 10 years with a moratorium of 3 years. There was no transaction cost and therefore the contractual rate is the same as the effective rate. The loan was granted directly to DML on 1 January, 2018.

The Financial Controller of Ariba Bank Plc. is concerned about the accounting treatment of the loan as IFRS 9 Financial Instrument was adopted by the bank during the year. He noted that the majority of the bank loans are classified at amortized cost in the statement of financial position, but the loans must pass certain tests before such classification.

The Chief Risk Officer noted in his memo that the arrangement is substantially the same as the other borrowing arrangements of the bank except that a borrowing entity would normally have equity or other assets that could be called upon by the bank in a case of default other than the asset being financed.

Required:
a. Discuss how financial assets are classified in accordance with the requirements of IFRS 9. (8 Marks)
b. Advise the Bank on how the loan granted to DML should be classified in the statement of financial position. (6 Marks)
c. Discuss, with supporting calculations, how the loan will be accounted for in the financial statement of the bank for the year ended 31 December, 2018. (6 Marks)

Answer

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Tags: Amortized Cost, Business Model Test, Effective Interest Rate, Financial Assets, IFRS 9, SPPI Test
Level: Level 3

Topic: IAS 39)

FR – Nov 2022 – L2 – Q4d – Amortisation Schedule for Bond

Prepare amortisation schedule for Lagos State Government Bond and record journal entries on maturity date.

Question

On January 1, 2020, an entity bought Lagos State Government Bond in the capital market for N575,000,000. The principal amount of the bond is
N500,000,000 and it is redeemable at par on December 31, 2025. The bond has a stated interest rate of 15% payable annually and an effective interest rate of 12%. Draft an amortisation schedule to indicate the amortised cost at the end of each year and the journal entries at the end of December 31, 2025

Answer

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Tags: Amortisation, Bond, Effective Interest Rate, Journal Entries, Lagos State Government Bond
Level: Level 2

Topic: Financial Instruments (IAS 32, IFRS 9)
Series: NOV 2022

QTB – Nov 2015 – L1 – SA – Q19 – Mathematics of Business Finance

This question asks which type of loan incurs a higher effective rate if paid off ahead of time.

Question

The borrower who pays off a …………………… ahead of time pays a higher effective rate:

A. Discounted loan
B. Standing loan
C. Amortised loan
D. Ordinary loan
E. Bank loan

Answer

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Tags: Effective Interest Rate, Loan Repayment
Level: Level 1

Topic: Mathematics of Business Finance
Series: NOV 2015

FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9

Calculate the amount to be recognized in Asamankese Ltd’s financial statements for a bond purchased at a discount under IFRS 9.

Question

Asamankese Ltd (Asamankese) purchased a 6% GH¢50 million bond on 1 August 2018 at a 10% discount to par value. Expenses of purchase were GH¢500,000. The bond is due for redemption on 31 July 2028 at par. The effective annual interest rate to maturity is 7.3%. Asamankese intends to hold the bond until its maturity date.

Required:
In accordance with IFRS 9: Financial Instruments, how much should be recognized in Asamankese’s financial statements in respect of the above transaction for the year ended 31 July 2019 (to two decimal places)?

Answer

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Tags: Amortized Cost, Bonds, Effective Interest Rate, IFRS 9
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2020

FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9

Calculate the amount to be recognized in Asamankese Ltd’s financial statements for a bond purchased at a discount under IFRS 9.

Question

Answer

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Tags: Amortized Cost, Bonds, Effective Interest Rate, IFRS 9
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2020

BMF – Mar July 2020 – L1 – SA – Q9 – Basics of Business Finance and Financial Markets

Calculating the effective interest rate for an account with quarterly compounding.

Question

What will be the effective rate for an account that pays 8% compounded quarterly?
A. 5.21%
B. 6.24%
C. 7.21%
D. 8.24%
E. 9.21%

Answer

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Tags: Compound Interest, Effective Interest Rate, Financial Calculations
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: MAR/JULY 2020

CR – Nov 2019 – L3 – Q2c – Financial instruments: Presentation and disclosure 511

Explain the accounting treatment for bonds issued by Kaduna Ltd using the amortised cost method.

Question

c) On 1 January 2018, Kaduna Ltd issued 10,000 bond instruments with a face value of GH¢100 at a market price of GH¢95. Bond brokers charged fees totalling GH¢18,000 in relation to the bond issue. The bonds carry a coupon rate of 5% and are redeemable in 3 years at face value.

Kaduna Ltd wishes to account for the bonds using IFRS 9: Financial Instruments amortised cost method. However, there was some confusion about how the bonds should be accounted for. Currently, the cash received from the bond issue of GH¢950,000 has been recognised as a non-current liability. The broker fees of GH¢18,000 were deducted from the non-current liability carrying amount, the coupon payment of GH¢50,000 has been expensed in arriving at profit before tax, and the effective rate of interest is 7.62%.

Required:
Justify the necessary accounting treatment of the above transaction relating to Kaduna Ltd for the year ended 31 December 2018. (5 marks)

Answer

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Tags: Amortised Cost, Bonds, Effective Interest Rate, IFRS 9
Level: Level 3

Topic: Financial instruments: Presentation and disclosure 511
Series: NOV 2019

FINANCIAL MANAGEMENT – MAY 2021 – L2 – Q1B – Discounted cash flow

Compute the effective annual interest rate and withdrawal amount for an investment account, and distinguish between annuity due and ordinary annuity.

Question

Puma Beverages Plc currently operates a single processing plant in Tema. The company plans to install and run processing plants in four other regions in Ghana.

The Finance Manager has presented an investment and financing strategy for this expansion project to the Board of Directors for their study. The proposed investment strategy is that the company sets up the four processing plants in turns. Specifically, the company will install the first plant at the end of the fifth year from now, the second at the end of the sixth year from now, and the rest follow annually in that order.

The proposed financing strategy is that the company finances the expansion project with its retained earnings. To do this, the company should deposit GH¢100 million into an investment account today. The account will earn interest at an annual nominal interest rate of 16%, with monthly compounding through the account’s life. The company will withdraw even amounts from the account at the end of each year starting from the end of year five until the account is closed at the end of year eight (i.e., four withdrawals in all) to finance the installation of each of the four processing plants in line with the investment strategy.

Required:
i) Compute the effective annual interest rate on the investment account. (3 marks)
ii) Compute the even amount that should be withdrawn from the account at the end of each year from the fifth year to the eighth year such that the account balance reduces to zero upon the last withdrawal at the end of the eighth year. (5 marks)
iii) Distinguish between annuity due and ordinary annuity. (2 marks)

Answer

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Tags: Annuity, Cash Flow Management, Effective Interest Rate, Investment strategy
Level: Level 2

Topic: Discounted cash flow

CR – May 2019 – L3 – Q3 – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Discuss the classification of financial assets under IFRS 9 and evaluate the appropriate accounting treatment of a loan granted to a special purpose entity.

Question

One of its major customers with a very good credit standing is Dunga Property Development Company (DPDC).

Answer

Find Related Questions by Tags, levels, etc.

Tags: Amortized Cost, Business Model Test, Effective Interest Rate, Financial Assets, IFRS 9, SPPI Test
Level: Level 3

Topic: IAS 39)

FR – Nov 2022 – L2 – Q4d – Amortisation Schedule for Bond

Prepare amortisation schedule for Lagos State Government Bond and record journal entries on maturity date.

Question

Answer

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Tags: Amortisation, Bond, Effective Interest Rate, Journal Entries, Lagos State Government Bond
Level: Level 2

Topic: Financial Instruments (IAS 32, IFRS 9)
Series: NOV 2022

QTB – Nov 2015 – L1 – SA – Q19 – Mathematics of Business Finance

This question asks which type of loan incurs a higher effective rate if paid off ahead of time.

Question

The borrower who pays off a …………………… ahead of time pays a higher effective rate:

A. Discounted loan
B. Standing loan
C. Amortised loan
D. Ordinary loan
E. Bank loan

Answer

Find Related Questions by Tags, levels, etc.

Tags: Effective Interest Rate, Loan Repayment
Level: Level 1

Topic: Mathematics of Business Finance
Series: NOV 2015

FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9

Calculate the amount to be recognized in Asamankese Ltd’s financial statements for a bond purchased at a discount under IFRS 9.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Amortized Cost, Bonds, Effective Interest Rate, IFRS 9
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2020

FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9

Calculate the amount to be recognized in Asamankese Ltd’s financial statements for a bond purchased at a discount under IFRS 9.

Question

Answer

Find Related Questions by Tags, levels, etc.

Tags: Amortized Cost, Bonds, Effective Interest Rate, IFRS 9
Level: Level 2

Topic: Financial Reporting Standards and Their Applications
Series: MAY 2020

BMF – Mar July 2020 – L1 – SA – Q9 – Basics of Business Finance and Financial Markets

Calculating the effective interest rate for an account with quarterly compounding.

Question

What will be the effective rate for an account that pays 8% compounded quarterly?
A. 5.21%
B. 6.24%
C. 7.21%
D. 8.24%
E. 9.21%

Answer

Find Related Questions by Tags, levels, etc.

Tags: Compound Interest, Effective Interest Rate, Financial Calculations
Level: Level 1

Topic: Basics of Business Finance and Financial Markets
Series: MAR/JULY 2020

CR – Nov 2019 – L3 – Q2c – Financial instruments: Presentation and disclosure 511

Explain the accounting treatment for bonds issued by Kaduna Ltd using the amortised cost method.

Question

Required:
Justify the necessary accounting treatment of the above transaction relating to Kaduna Ltd for the year ended 31 December 2018. (5 marks)

Answer

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Tags: Amortised Cost, Bonds, Effective Interest Rate, IFRS 9
Level: Level 3

Topic: Financial instruments: Presentation and disclosure 511
Series: NOV 2019

FINANCIAL MANAGEMENT – MAY 2021 – L2 – Q1B – Discounted cash flow

Compute the effective annual interest rate and withdrawal amount for an investment account, and distinguish between annuity due and ordinary annuity.

Question

Puma Beverages Plc currently operates a single processing plant in Tema. The company plans to install and run processing plants in four other regions in Ghana.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Annuity, Cash Flow Management, Effective Interest Rate, Investment strategy
Level: Level 2

Topic: Discounted cash flow

Question Tag: Effective Interest Rate

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CR – May 2019 – L3 – Q3 – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Discuss the classification of financial assets under IFRS 9 and evaluate the appropriate accounting treatment of a loan granted to a special purpose entity.

You're reporting an error for "CR – May 2019 – L3 – Q3 – Financial Instruments (IFRS 9, IAS 32, IAS 39)"

FR – Nov 2022 – L2 – Q4d – Amortisation Schedule for Bond

Prepare amortisation schedule for Lagos State Government Bond and record journal entries on maturity date.

You're reporting an error for "FR – Nov 2022 – L2 – Q4d – Amortisation Schedule for Bond"

QTB – Nov 2015 – L1 – SA – Q19 – Mathematics of Business Finance

This question asks which type of loan incurs a higher effective rate if paid off ahead of time.

You're reporting an error for "QTB – Nov 2015 – L1 – SA – Q19 – Mathematics of Business Finance"

FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9

Calculate the amount to be recognized in Asamankese Ltd’s financial statements for a bond purchased at a discount under IFRS 9.

You're reporting an error for "FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9"

FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9

Calculate the amount to be recognized in Asamankese Ltd’s financial statements for a bond purchased at a discount under IFRS 9.

You're reporting an error for "FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9"

BMF – Mar July 2020 – L1 – SA – Q9 – Basics of Business Finance and Financial Markets

Calculating the effective interest rate for an account with quarterly compounding.

You're reporting an error for "BMF – Mar July 2020 – L1 – SA – Q9 – Basics of Business Finance and Financial Markets"

CR – Nov 2019 – L3 – Q2c – Financial instruments: Presentation and disclosure 511

Explain the accounting treatment for bonds issued by Kaduna Ltd using the amortised cost method.

You're reporting an error for "CR – Nov 2019 – L3 – Q2c – Financial instruments: Presentation and disclosure 511"

FINANCIAL MANAGEMENT – MAY 2021 – L2 – Q1B – Discounted cash flow

Compute the effective annual interest rate and withdrawal amount for an investment account, and distinguish between annuity due and ordinary annuity.

You're reporting an error for "FINANCIAL MANAGEMENT – MAY 2021 – L2 – Q1B – Discounted cash flow"

CR – May 2019 – L3 – Q3 – Financial Instruments (IFRS 9, IAS 32, IAS 39)

Discuss the classification of financial assets under IFRS 9 and evaluate the appropriate accounting treatment of a loan granted to a special purpose entity.

You're reporting an error for "CR – May 2019 – L3 – Q3 – Financial Instruments (IFRS 9, IAS 32, IAS 39)"

FR – Nov 2022 – L2 – Q4d – Amortisation Schedule for Bond

Prepare amortisation schedule for Lagos State Government Bond and record journal entries on maturity date.

You're reporting an error for "FR – Nov 2022 – L2 – Q4d – Amortisation Schedule for Bond"

QTB – Nov 2015 – L1 – SA – Q19 – Mathematics of Business Finance

This question asks which type of loan incurs a higher effective rate if paid off ahead of time.

You're reporting an error for "QTB – Nov 2015 – L1 – SA – Q19 – Mathematics of Business Finance"

FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9

Calculate the amount to be recognized in Asamankese Ltd’s financial statements for a bond purchased at a discount under IFRS 9.

You're reporting an error for "FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9"

FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9

Calculate the amount to be recognized in Asamankese Ltd’s financial statements for a bond purchased at a discount under IFRS 9.

You're reporting an error for "FR – May 2020 – L2 – Q2c – Bond Recognition under IFRS 9"

BMF – Mar July 2020 – L1 – SA – Q9 – Basics of Business Finance and Financial Markets

Calculating the effective interest rate for an account with quarterly compounding.

You're reporting an error for "BMF – Mar July 2020 – L1 – SA – Q9 – Basics of Business Finance and Financial Markets"

CR – Nov 2019 – L3 – Q2c – Financial instruments: Presentation and disclosure 511

Explain the accounting treatment for bonds issued by Kaduna Ltd using the amortised cost method.

You're reporting an error for "CR – Nov 2019 – L3 – Q2c – Financial instruments: Presentation and disclosure 511"

FINANCIAL MANAGEMENT – MAY 2021 – L2 – Q1B – Discounted cash flow

Compute the effective annual interest rate and withdrawal amount for an investment account, and distinguish between annuity due and ordinary annuity.

You're reporting an error for "FINANCIAL MANAGEMENT – MAY 2021 – L2 – Q1B – Discounted cash flow"

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