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Dear Stephen, Would you please help me this question? the details are shown as follows:
01/12/2004 borrowed 47m, market interest rate 5%; 30/11/2005 borrowed additional 45m when market interest rate 7.4%, both liabilities are repayable on 30/11/2009. required: accounting liability under current accounting standards by using amortised value and fare value respectively at 30/11/2005.The answer:
Amortised value: 30/11/2005 initial loan 47+47×5%=49.35; new loan 45
Fair value: 30/11/2005 initial loan 45; new loan 45 it would be a net profit 2 which made up interest expense 47 x 5%=2.35 and unrealized gain 49.35-45=4.35I am very confused that why they use 45 for both loan on 30/11/2005 under fare value method? i was trying to use factor 7.4% for calculation present value annuity, my answer is 43.40, how they calculate fare value by using 45? many thanks
Dear Stephen, the answer in the amortised value section also said that initial loan: 47×1.05 for 5 years=59.98; new loan 45×1.074 for 4 years=59.89, which they are almost identical on 30/11/2009. do you think this is an evidence of level 1 active market to measure both loan fare value as 45 at 31/11/2005?
Many thanksNot sure I can help – this is nothing like anything I’ve seen in the current syllabus.
Looks like old syllabus where current issues were examined in much more depth.
You can refer to this posting:
https://opentuition.com/topic/fair-value-of-financial-liability/
Recommend you don’t spend much time here.
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