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In examiner answer, it does not talk about Debenture loan and possible misstatement because Debenture loan remains unchanged. I think it should be accounted for using Amortised Cost at year end and Interest is capitalised if modernization is qualifiying assets. So Debenture loan could be understated, and may also not disclosed it in the Notes. Can I say such thing and gain marks?
The debenture loan is a liability which has increased by $5m because of the additional borrowing. Annual interest is a finance cost (which has increased) and the answer considers the risk that perhaps it should have been capitalised rather than expensed (though unlikely to be material).
I mean that $5m Debenture should have reduced at year end because it should be subsequently meased using Amortised coat meithod. That’s y I think Debenture could be understated if finance cost is charged at the end if each year. I think this is ROMM too, but examiner does not mention about this audit risk.
Amortised cost of a liability = Initial cost – Repayments of principal +/- amortisation of differences between initial amount and maturity amount.
There is nothing in this scenario to suggest that the amount to be repaid (on maturity) is any different to the principal (amount initially borrowed).
As the company has taken out a further loan of $5m it is highly unlikely that it has repaid any principal during the year (and if it had, and it was relevant, the Q would have to specify – you couldn’t make this up).
So all we have here is $55m existing loan + $5m new loan = $60m projected balance
The double entry for the accrual of interest is Dr Finance cost and Cr Current liabilities. Finance cost has increased during the year so there is nothing to suggest that interest has not been accrued (or paid).
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