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Stephen Widberg.
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jingdong
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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
jingdong
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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 thanks
Stephen Widberg
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Not 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.
jingdong
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