Chapter 6 - Effective Interest Method Flashcards
Also known as scientific method or simply “interest method”
Effective interest method
The effective interest distinguishes two kinds of interest rate, namely the _____ and _____.
Nominal rate
Effective rate
The nominal rate is the COUPON or _____.
Stated Rate
The effective rate is the YIELD or _____.
Market rate
The rate that exactly discounts estimated cash future payments through the expected life of the bonds payable or when appropriate,ma shorter period to the net carrying amount of the binds payable.
Effective rate
When the binds are sold at _____, the effective rate and the nominal rate are the same.
Face value
When the bonds are sold at _____ or _____, the effective rate and the nominal rate differ.
Discount or premium
When the binds are sold at _____, the effective rate is lower than the nominal rate.
Premium
When the binds are sold at a _____, the effective rate is higher than the nominal rate.
Discount
Under the effective interest method, the ______ is determined by multiplying the EFFECTIVE RATE BY THE CARRYING AMOUNT OF THE BONDS.
Effective interest expense
The carrying amount of the bonds changes _____ as the amount of premium or discount is amortized periodically.
Every year
The effective interest is then compared with the nominal interest. The difference is the premium or discount amortization.
The premium amortization is computed as follows:
Nominal interest (nominal rate x face value) Less: Effective interest (effective rate x carrying amount)
Premium amortization
The discount amortization is computed as follows:
Effective interest
Less: Nominal interest
Discount amortization
The carrying amount is actually the _____ contemplated in the standard.
Amortized cost
R: note that the payment of the semiannual interest and the periodic amortization of the discount are compounded in one entry. The two items can be separately recorded.
Okay
The market price or issue price of bond payable is equal to the…
Present value of the principal bind liability plus the present value of future interest payments using the effective market rate of interest.
The present value of the principal bond liability is equal to the _____ of the bond multiplied by the PRESENT VALUE OF 1 factor at the effective rate for a number of interest periods.
Face value
The present value of the future interest payments is equal to the _____ multiplied by the PRESENT VALUE OF AN ORDINARY ANNUITY OF 1 factor at the effective rate for a number of interest periods.
Periodic nominal interest
The market price or issue price of the bonds payable is equal to the _____ of the principal bond liability plus the _____ of future interest payments.
Present value
Present value
PFRS 9 provides that ““transaction costs that are directly attributable to the issue of a financial liability _____ in the initial measurement of the financial liability.
Shall be included
Defined as fees and commissions paid to agents, advisers, brokers, and dealers, levies by regulatory agencies and securities exchange, and transfer taxes and duties.
Transaction costs
TF: transaction costs include bond issue costs.
True
Tye calculation of effective interest rate shall include all transaction costs, premiums, and discounts
Bond issue costs will _____ discount on bonds payable, and will _____ premium on binds payable
Increase
Decrease
Under the effective interest method, bond issue cost must be _____ with the discount on binds payable and _____ against the premium on bonds payable
Lumped
Netted
The effective rate cannot be computed algebraically but by means of _____ or the “interpolation process”
Trial and error
The calculation of the effective rate requires the use of mathematical table of _____ and _____.
Present value of a single payment
Present value of an ordinary annuity
PFRS 9 requires that discount on binds payable, premium on bonds payable and bind issue cost shall be amortized using the _____.
Effective Interest Method
