Accounting for Step-up Bond

Australia Discussion in 'Technical Queries' started by HenryN, Oct 6, 2018.

  1. HenryN

    HenryN

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    How would you account for this bond under IFRS:
    Face Value: $1m
    Issue Price: $1m
    Coupon Payment:
    Year 1: 4%
    Year 2: 6%
    Year 3: 8%
    Year 3: Maturity

    Is it either:
    a)
    Year 0 Dr Cash $1m Cr Bond liability $1
    Year 1 Dr Interest exp $40,000 Cr Cash $40,000
    Year 2 Dr Interest exp $60,000 Cr Cash $60,000
    Year 3 Dr Interest exp $80,000 Cr Cash $80,000
    Year 3 Dr Bond liability $1m Cr Cash $1m
    or;
    b)
    Year 0 Dr Cash $1m Cr Bond liability $1
    Year 1 Dr Interest exp $59,233 Cr Cash $40,000 Cr Bond liability $19,233
    Year 2 Dr Interest exp $60,372 Cr Cash $60,000 Cr Bond liability $372
    Year 3 Dr Interest exp $60,394 Cr Cash $80,000 Dr Bond liability $19,606
    Year 3 Dr Bond liability $1m Cr Cash $1m

    Calculated using the effective interest rate of 5.9233% of outstanding balance (discounts all cash flows back to $1,000,000 PV)

    Typically, bonds issued at par have the same coupon rate for all three years (e.g. 6%), so you simply debit the interest expense and credit cash at bank. Whereas bonds issued at a premium/discount will require debit/credit adjustments to the bond liability account.

    Seeing as the bond mentioned above (despite being issued at par) has a coupon rate below market rate for year 1 and above market rate for year 3, would you need to do the same debit/credit to the bond liability account (similar to if it was issued at premium/discount).

    I would really value everyone's opinion and if you could point me to a specific section that would be absolutely terrific.

    Thank-you
     
    HenryN, Oct 6, 2018
    #1
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