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June 09 Q2-Pricewell, condition iv, 6% preference shares issued on 1 Apr 07 at par for 40m. Effective finance cost of 10% annual. And on trial bal. 6% redeemable preference shares at 31 Mar 08 is 41.6m. Preference div. paid 8m.
I always get troubled with this for
1) Finance cost
2) carrying value of this as loan.
3) what’s the difference between 6% and 10%More details for explanation. Thanks.
1)Effective finance cost of 10% on the opening balance goes to the Income Statement.
2)Carrying value can be calculated as:
Opening balance + Effective finance cost – dividend paid
in this qn,
41.6m + 4.16m – 2.4 = $43.36m3)6% is the interest which is paid.
these preference shares are redeemable at a premium. this will be an expense for the company at the time of redemption. instead of charging the expense as a whole at redemption, these costs are spread through the period of debt. this will increase the finance costs. though the income statement is charged with a higher rate of interest, i.e, 10% here; only 6% is paid out every year.
Always, it is the higher rate that is to be charged to the income statement.One more doubt: when we are calculating closing bal. of R.E. for equity part on SoFP. Why not deducting this 2.4m preference div. paid? Because it is as interest in Finance cost, right? Actually, it is not div, just an expense for annual interest payment?
Yes…u r right. Redeemable preference shares are classified as financial liability, not equity.
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