Active learning ideas
Accounting for borrowings and finance costs focuses on how companies manage long-term debt, such as bank loans and debentures. Students learn to record the receipt of loan funds, the accrual of interest, and the eventual repayment. This topic is particularly relevant in Singapore's financial landscape, where corporate leverage is a common strategy for growth. It introduces students to the concept of financial risk and the obligation of meeting fixed interest payments regardless of profit levels.
Activity 01
Students are given a scenario where a company needs $1 million. They individually list the pros and cons of a bank loan versus issuing shares, then pair up to decide on the best mix for a stable company versus a high-growth startup.
How are debentures different from equity shares?
Activity 02
Groups are given a loan agreement with a mid-year start date and quarterly interest payments. They must work together to calculate the interest expense for the current financial year and the accrued interest liability at year-end.
What is the accounting treatment for accrued interest?
Activity 03
Students simulate a meeting between a struggling company and its debenture holders. The 'directors' must explain why they missed an interest payment, while 'investors' argue for their rights, highlighting the legal obligations of debt.
How do borrowings affect a company's risk profile?
A few notes on teaching this unit
Watch Out for These Misconceptions
The repayment of the loan principal is an expense.
Repaying the principal is a reduction of a liability, not an expense. Only the interest paid on the loan is an expense. Peer-led ledger exercises help students see that principal payments affect the Statement of Financial Position, while interest affects the Statement of Comprehensive Income.
Debentures are a type of share capital.
Debentures are long-term debt instruments, not equity. Debenture holders are creditors, not owners, and they receive interest rather than dividends. Using a Venn diagram in small groups helps students clarify the differences in rights and accounting treatment.
Methods used in this brief
Equity and Issuance of Shares
Understand the structure of a company's equity, including ordinary and preference shares. Analyse the accounting entries for the issuance of shares and payment of dividends.
8 methodologies
Preparation of Company Financial Statements
Prepare the Statement of Comprehensive Income and Statement of Financial Position for limited companies. Apply year-end adjustments specific to corporate entities.
8 methodologies
Statement of Cash Flows
Prepare and interpret the Statement of Cash Flows for a limited company. Distinguish between operating, investing, and financing activities.
8 methodologies