Financial instruments - part 6

In this lesson

1. 0:00 Introduction to financial liabilities calculation
2. 0:18 Understanding zero coupon bonds and par value
3. 1:02 Three percent bond with issue costs explained
4. 1:57 Classification and initial measurement principles
5. 2:17 Instrument one: zero coupon bond solution
6. 3:19 Double entry for zero coupon bond accounting
7. 4:44 Instrument two: coupon bond with issue costs
8. 6:17 Double entry for coupon bond accounting
9. 7:53 How financial liabilities grow to maturity

About this lesson

This session covers zero-coupon bonds and coupon-bearing bonds, demonstrating how to apply the effective interest method and the accruals concept when financial liabilities are issued at face value or at a discount. Essential for Financial Reporting and Advanced Financial Reporting papers, this technique appears regularly in exam questions and is fundamental to understanding liability accounting. The first example walks through a zero-coupon bond issued at face value with no interest payments. You'll see how to calculate the finance cost using the market rate of interest rather than the coupon rate, and how the liability grows each year until redemption. The second example introduces issue costs, showing how net proceeds affect the carrying value and subsequent interest calculations—a critical distinction that changes the finance cost amount. By the end of this lesson, you'll confidently handle both straightforward and more complex liability scenarios, understand why the effective interest method matters, and be able to construct the correct double entries for initial recognition and year-end adjustments. This foundation will help you tackle case study questions and objective tests that combine multiple financial instruments.

Duration: 8m