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Hi John,
1)why are we purchasing loan notes at 3200, when they are trading at 96/100 ?2) Whenever we sell assets and make profit on them, do we always take them to the reserves or are we doing in this case specifically because it has been asked in the question?
Thanks1. The question asks for a SOFP. Loan notes always appear in the SOFP at par/nominal value – not at the market value.
2. Profit on sale of non-current assets always increases retained earnings.
i understand that we will remove the loan notes par value from SOFP, but when we are paying back, we will pay back the market value of the loan rather than par value. The total proceeds we got from the sale will be reduced by the market value of the loan rather than the par value, so that the remaining can be invested in current & non current assets. Is this not the case?
These are not shares that the company buys back and cancels. The company has borrowed money and must repay the money – either they repay now, or they repay later in which case they pay interest at the fixed coupon rate until repayment.
The market value is the price that investors are willing to buy and sell to/from each other (and is lower than par because the fixed interest is no longer as attractive to them as maybe it was).
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