ACCOUNTING ASSIGNMENT

Accounting Assignment

Accounting Assignment

1. You acquire the outstanding loan (note) of the Dragon Q Company, who is having financial difficulty. Because of the financial difficulty Dragon Q's credit rating has been downgraded and you acquire the note at a discount. To determine the purchase price of the note you discount it at the effective rate of interest rather than the rate of interest stated on the note. Was it correct for you to discount the loan at the effective interest rate? (This is not troubled debt restructuring.)

35-1: The debt discount shall be amortized by the interest method, using the effective interest rate.

In order to know precisely the value of money over time is necessary that the nominal interest rates are converted to effective rates. The effective rate is actually the one to which the capital is located. The capitalization of interest in a number of times per year is resulting in an effective rate greater than the nominal. This rate represents the overall interest payments, taxes, fees and any other type of financial transaction costs that implies. The effective rate is an exponential function of the periodic rate. Nominal and effective rates have the same relationship to each other than simple interest with compound. The differences are apparent in the definition of two rates. In order to know precisely the value of money over time is necessary that the nominal interest rates are converted to effective rates. By definition of the nominal word "alleged, called, ostensible or professed" would say that the nominal interest rate is not correct, real, genuine or effective (Financial Accounting Standards Board, 2007). The nominal interest rate can be calculated for any period longer than originally intended. For example: An interest rate of 2.5% per month, also expressed as a nominal 7.5% per quarter (2.5% per month for 3 months), 15% for six-month period, 30% or 60% annually for 2 years. The nominal interest rate ignores the value of money over time and the frequency with which capitalized interest.

2. Your company began operations on January 1, 2012, and incurred $50,000 of organization costs for starting-up the new business. These costs were the fees you paid to the State that you incorporated in. You expensed these costs rather than capitalizing them as an asset. Were you correct in expensing these costs?

15-2 The guidance in this Subtopic applies to start-up activities. The definition of start-up activities ...