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Entity issues $1,000,000 6% loan notes on 1 January 20X4, incurring issue costs of $300,000. These loan notes have an effective rate of interest of 8% per annum. What is the finance cost to be shown in the statement of profit or loss for the year ended 31 December 20X5?
The correct answer is £55,680 but I cannot seem to get this.
I was wondering if you could help?
You have to deduct the issue of costs of 300,000.
So the opening carrying amount would be 700,000
The finance costs in the first year would be 6% of this number
Then deduct the cash paid which is 6% of 1 million
That will give you the carrying amount at the end of the first year
The finance cost in the second year will be 6% of this number
I have to say that I am very surprised to see issue costs which are 30% of the value of the loan- normally they would be 3%
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