Amortisation

Hello Sir,

Why in the following question we did not use the amortisation cost just accrual of interest ,

but in the second question we used amortization cost,

the when we must use the amortization and when must not ?

Thanks,

A 5% loan note was issued on 1 April 20X0 at its face value of $20 million. Direct costs of the issue were
$500,000. The loan note will be redeemed on 31 March 20X3 at a substantial premium. The effective interest
rate applicable is 10% per annum.
At what amount will the loan note appear in the statement of financial position as at 31 March 20X2?

A $21,000,000
B $20,450,000
C $22,100,000
D $21,495,000

Answer

D $21,495,000
$’000
Proceeds (20m – 0.5m) 19,500
Interest 10% 1,950
Interest paid (20m × 5%) (1,000)
Balance 30 March 20X1 20,450
Interest 10% 2,045
Interest paid (20m × 5%) (1,000)
21,495
——————————————————————————————————————————

An 8% $30 million convertible loan note was issued on 1 April 20X5 at par. Interest is payable in arrears on
31 March each year. The loan note is redeemable at par on 31 March 20X8 or convertible into equity shares
at the option of the loan note holders on the basis of 30 shares for each $100 of loan. A similar instrument
without the conversion option would have an interest rate of 10% per annum.
The present values of $1 receive at the end of each year based on discount rates of
8% and 10% are:
8% 10%
End of year 1 0.93 0.91
2 0.86 0.83
3 0.79 0.75
cumlative 2.58 2.49

What amount will be credited to equity on 1 April 20X5 in respect of this financial instrument?

A $5,976,000
B $1,524,000
C $324,000
D $9,000,000

Answer
B $1,524,000
$’000
Interest years 1–3 (30m × 8% × 2.49) 5,976
Repayment year 3 (30m × 0.75) 22,500
Debt component 28,476
Equity option (?) 1,524
30,000