ACCA Applied Skills · Financial Reporting · Financial instruments
Orion Co's convertible bond has a liability component of $9,228,500 on 1 January. It pays annual interest of $500,000 in arrears at a coupon of 5%, and the effective rate is 8%. What is the carrying amount of the liability component at the end of the first year, after the interest payment?
The closing liability is $9,466,780. The finance cost is the opening liability of $9,228,500 multiplied by the 8% effective rate, giving $738,280. The $500,000 cash interest paid is then deducted from the balance after adding that finance cost, leaving $9,466,780.
- A$9,466,780Correct
- B$9,728,500
- C$9,966,780
- D$9,689,925
Explanation
Finance cost = 9,228,500 × 8% = 738,280. Closing liability = 9,228,500 + 738,280 − 500,000 cash paid = 9,466,780. $9,966,780 forgets to deduct the cash interest paid, and $9,689,925 wrongly applies the 5% coupon rate to the opening balance.
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