7 Loan interest / preference dividends Question 5

This topic has 4 replies, 2 voices, and was last updated 10 years ago by MikeLittle.

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November 29, 2015 at 7:12 am #286053
DreamerSK
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Please can you tell me why the calculation does not include the issue costs of 1 million and why we calculate the difference between the two rates and not just use the effective as we did in previous examples. Thanks.
November 29, 2015 at 11:29 am #286105
DreamerSK
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The above question is from the mini exercises..
November 29, 2015 at 9:50 pm #286221
MikeLittle
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1) Because the issue costs are debited to the loan account itself

2) Because that’s what we’re told to do – it’s the rule!
November 30, 2015 at 12:47 am #286267
DreamerSK
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Thanks for 1 above. I still don’t understand 2 as we have just used the effective rate in Q3. How does Q3 differ from Q5 apart from the issue costs?
November 30, 2015 at 8:30 am #286321
MikeLittle
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We used both rates in question 3!

800 represents 6/12 x 2% x 80,000.

The effective rate is 6%.

6% x 80,000 for half a year is 2,400.

800 has been paid

So we need to accrue a further 1,600

Ok?
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