Available-for-sale asset – determination of interest
A company acquires a zero coupon bond at the end of 2013 for 760, its fair value, which matures at the beginning of 2017 at 1,000. It is classified as an available-for-sale asset and, accordingly, associated fair value gains and losses are recognised in other comprehensive income. Its fair value at the end of 2014, 2015 and 2016 is 850, 950 and 1,000 respectively and it can be determined that the effective interest rate is 9.6% (the effective interest method is discussed in more detail at 5 below).
The financial statements would therefore include the accounting entries set out in the following table (amortised cost is memorandum information used to determine interest).