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ACCA Strategic Professional · Strategic Business Reporting (International) · Financial instruments

Using the Hale bonds, the liability component at 1 January 20X1 was $921,272 with an effective rate of 7% and a coupon of $40,000 paid on 31 December 20X1. What is the finance cost for 20X1 and the carrying amount of the liability at 31 December 20X1 (to the nearest $)?

The finance cost is $64,489, being 7% of the opening liability of $921,272. The closing liability is $945,761, which is the opening balance plus the finance cost less the $40,000 coupon paid. The liability unwinds towards the $1 million redemption value.

  1. AFinance cost $40,000; liability $921,272
  2. BFinance cost $64,489; liability $945,761Correct
  3. CFinance cost $64,489; liability $985,761
  4. DFinance cost $70,000; liability $951,272

Explanation

Finance cost = 921,272 x 7% = 64,489. Closing liability = 921,272 + 64,489 - 40,000 coupon paid = 945,761. Using $985,761 adds the coupon instead of deducting it. Using only the coupon as cost ignores the effective interest method.

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