1. Scenario Technical Specifications
An investment fund purchases a 5-year corporate bond on 1 January 2026.
  • Nominal Principal Value: $1,000,000
  • Stated Annual Coupon Rate: 4% paid annually on 31 December ($40,000 cash per year).
  • Purchase Price paid: $915,500 (purchased at a discount).
  • Direct Capitalizable Transaction Costs incurred: $4,500
  • Initial Total Carrying Value Basis (Amortized Cost Baseline): $920,000
  • The Calculated Effective Interest Rate (EIR) based on initial inputs is 6.00% per annum.

2. Year 1 Financial Statements Accounting Adjustments
At the end of Year 1 (31 December 2026), the fund receives cash interest and records interest income using the effective interest method:
  • Cash Interest Received = Cash Receipt = 1000000 × 4% = 40000
    Effective Interest Income = Interest Income = Initial Carrying Value × EIR = 920000 × 6.00% = 55200
    Amortized Discount Adjustment = Discount Amortization = Interest Income − Cash Receipt = 55200 − 40000 = 15200

3. Ledger Configuration Ledger Entries
The entity records the following adjustments to update the bond’s carrying value at year-end:
[31 December 2026 Ledger Entry]
  • Debit: Cash                               $40,000
  • Debit: Bond Investment Asset (Amortization) $15,200
  • Credit: Interest Income (Profit or Loss)            $55,200

[Carrying Value Rolling Balance Calculation]
  • Opening Asset Balance (1 Jan 2026):   $920,000
  • Year 1 Principal Amortization Entry:  + $15,200
  • Closing Asset Balance (31 Dec 2026):  $935,200
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