Hi all, In Curriculum 2013 vol2 p.80 Example 11 - The income statement for solution 1 shows that the interest expense of $7132 is booked to year 1. - But the CF statement for solution 2 shows that the interest paid of $7132 is booked to year 2. Very Confused?! Or is it something wrong in this example in Curriculum??? Can some experts please help to clarify. Larry.
Bump - has anyone solved this?
May be this would clarify:
Just read the statement below the table
“Part of the lease payments pays any interest accrued in the previous year” Also, look at the heading of column ©- it says its the ‘accrued interest’.
It is typical case of accrued interest/accounting - cash payment lags incurrence of interest expense.
Lease payments are made at the beginning of the year. During year 1, you are still incurring interest on the UNPAID portion of the lease liability /(loan). This is will have to recognised in the income stmt during the year. So, you incur interest on the unpaid portion, (but you pay cash later, some of which is interest on the current unpaid portion, at the beginning of next year). That is why it is recognised during year-1.
May be this would clarify:
Just read the statement below the table
“Part of the lease payments pays any interest accrued in the previous year” Also, look at the heading of column ©- it says its the ‘accrued interest’.
It is typical case of accrued interest/accounting - cash payment lags incurrence of interest expense.
Lease payments are made at the beginning of the year. During year 1, you are still incurring interest on the UNPAID portion of the lease liability /(loan). This is will have to recognised in the income stmt during the year. So, you incur interest on the unpaid portion, (but you pay cash later, some of which is interest on the current unpaid portion, at the beginning of next year). That is why it is recognised during year-1.
Interest Paid =/= Interest Expense. You can ignore this logic in a couple of spots in the curriculum (fixed income, I think), but overall, stick in your head. Will be helpful for leases and FCFF.
Nope: for bonds issued at a premium or discount, interest expense ≠ coupon.