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Hi , I face 2 issues in part (c) which talks about ethics
1) The examiners’ answer states that interest- free loan has no impact on interest cover. But from what I have learnt from F7, it should be recognised as present value initially and subsequently measured on amortised basis. As such , there should have finance cost charged to SOPL since the loan is taken out shortly before year end.
2) The answers stated that ‘ Should the overdraft be included within debt, the loan would substantially improve the gearing ratio ……”.( in second paragraph of model answer).
Is the ‘debt’ used by examiners refer to Trade payables, so the gearing ratio will be improved throught elimination from the ‘liabilities’ but included in Trade payables?I hope to obtain clarification from tutor . Thank you
Hi,
1) If the loan is not issued at a discount or redeemed at a premium then the amount shown in the financial statements will be the same as the proceeds of the loan, and there will then be no effective interest on the loan either. In this case there will then be no interest and hence no impact on the interest cover.
2) If the money is being received it will then eliminate the overdraft and therefore reduce the level of debt, and if debt is reduced then it will reduce gearing. As they have included the other side of the entry as a trade payable then this will not be included as part of the debt figure.
Thanks
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