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CFA Level I · CFA Level I Exam · Topics in Long-Term Liabilities and Equity

A company issues 2,000,000 face value bonds at 98 and pays 30,000 in underwriting and legal costs. Under IFRS, with bonds measured at amortized cost, the initial carrying amount of the liability is closest to:

The initial carrying amount is about 1,930,000. Proceeds at 98 are 1,960,000, and under IFRS issuance costs of 30,000 are deducted from the liability's initial measurement, which raises the effective interest rate above the stated yield on the proceeds.

  1. A1,930,000Correct
  2. B1,960,000
  3. C1,990,000

Explanation

Proceeds = 2,000,000 × 0.98 = 1,960,000. Under IFRS, issuance costs are deducted from the initial carrying amount: 1,960,000 − 30,000 = 1,930,000. Using 1,960,000 ignores the costs, as US GAAP's separate asset presentation might suggest; 1,990,000 wrongly adds them.

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