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A Ltd. takes a 5-year ₹10,000 loan at 10% fixed (interest paid yearly, bullet principal at year 5). Loan processing fees of ₹500 are paid upfront. Under Ind AS 109, initial recognition of the loan liability is at:
A₹9,500 — but with the ₹500 deferred as a non-current asset on the balance sheet
B₹10,500 — face value plus the processing fees
C₹10,000 — the face value of the loan; processing fees expensed immediately
D₹9,500 (i.e., principal ₹10,000 less processing fees ₹500); effective interest rate is recomputed (≈ 11.42%) to amortise the ₹500 differential over 5 years through interest expense
Answer & Solution
Correct answer: D. ₹9,500 (i.e., principal ₹10,000 less processing fees ₹500); effective interest rate is recomputed (≈ 11.42%) to amortise the ₹500 differential over 5 years through interest expense
Para 5.1.1 — directly attributable transaction costs are netted against the amortised-cost liability at initial recognition. Initial CV = ₹9,500. The EIR is recomputed to amortise the ₹500 differential over 5 years — EIR rises to ≈ 11.42% (above the stated 10%). Interest expense each year applies EIR to the carrying amount.
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