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Purple Co had a bank loan outstanding of $3,400,000 at 31 December 20X4. During 20X5 Purple Co was charged and paid interest of $170,000, it was loaned an additional $200,000 and at the end of 20X5 the balance outstanding on the loan was $3,100,000.
How much should be included within cash flows from financing activities in the statement of cash flows for the repayment of the bank loan?
A.$500,000
B.$670,000
C.$300,000
D.$470,000
The correct answer is A.Why they have included interest paid and charged under financing activities. It should come under operating activities and should not have been included anywhere in this calculation. Am I right?
The answer has not included the interest.
The question only asks for the amount that was repaid on the loan.
They had owed 3,400,000 at the start of the year. They borrowed an additional 200,000. That would have meant they were then owing 3.600,000. Given that they only owed 3,100,000 at the end of the year, they must have repaid the difference of 500,000.
Balance b/d 3,400,000
Interest charged 170,000
Further loan 200,000
Interest paid (170,000)
Amount repaid (500,000)
Balance c/d 3,100,000this is the workings of the answer on ACCA StudyHub website. I don’t understand why interest amount are included in the workings.
It does not need to be included in the workings.
The reason they are shown is that they were charged interest and if they had not paid the interest then it would have increased the amount owing on the loan. However, since they had paid the interest, it does not affect the total amount owing.
So it is irrelevant whether or not you show it in your workings because it does not affect the answer (and of course nobody ever looks at your workings in the exam because it is marked by computer 🙂 )
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