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Afternoon Mike,
I am having difficultly answering questions about loan notes especially as they appear in q2 – published accounts.
Referring to Cavern dec 10The 8% loan note was issued on 1 October 2008 at its nominal (face) value of £30 million. The loan note will be redeemed on 30 September 2012 at a premium which gives the loan note an effective finance cost of 10% per annum.
What I always do is discount it to present value and then multiply by interest. This doesn’t give me the correct answer. But if I always multiply by effective rate of interest and then deduct 8% as an instalment then it is ok.
When do I have to bring it down to present value and when do I have to use the above method?
If you could help I would greatly appreciate.
Many thanks, anuj.
I believe that you’re making the whole issue overly-complicated.
I seem to remember from Cavern that you need to apply the effective rate (wasn’t it for just 9 months(?) though I could be wrong there) and then calculate was was the “true” expense for the year. Deduct from that calculated amount the interest actually PAID in the year (from the trial balance) and that would give you the additional amount to accrue.
Does that resolve your problem or are you still in the dark?
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