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Hi Mike, I am confused with the “interest paid on loan note” part on this question: Llama Co (question 2 from December 2007 paper I believe):
The note:
The 2% loan note was issued on 1 April 2007 under terms that provide for a large premium on redemption in 2009. The finance department has calculated that the effect of this is that the loan note has an effective interest rate of 6% per annum.On the trial balance writes “loan interest paid” of amount $800,000; “2% loan note” of principal amount of $80m.
I was supposed to prepare the SOFP. What actually happens to the carrying amount of the loan note when the interest rate of loan changes and when a portion of interest has already been paid?
The answer gave a carrying amount of $81.6m, which I do not understand at all.
Hi Mike, sorry I have another question pertaining to the Llama Co question as well. The trial balance provided an “income tax” figure of $400, and said “the balance of income tax in the trial balance represents that under/over provision of the previous year’s estimate”. How do we know whether it is an under OR over provision of the previous year’s estimate? In arriving at the income tax expense figure at SOPL, the $400 was deducted, which I assume that that represented an “over-provision amount”. But why? No other information was given on this.. 🙁
For half a year, 2% on $80 million is $1.6 million / 2 = $800,000 and that amount has been paid
I assume that the loan was issued only half way through the year
The effective loan interest should be calculated at 6% and 6% on $80 million for half a year is $2.4 million
That’s what SHOULD have been paid if the ‘correct’ effective interest had been paid
But of the $2.4 million, only $800,000 has actually been paid
So the “missing” $1.6 million is rolled up into the loan liability to give ur $80 million + $1.6 million = $81.6 million
OK?
“How do we know whether it is an under OR over provision of the previous year’s estimate?”
Why on this Earth do you want to know that?
Is it a debit balance or a credit balance – that’s all you need to know!
Check back through the F7 Ask ACCA Tutor forum questions from the last 3 or 4 months where I have written out countless times how to tackle this issue
The one thing that you really do NOT need to know is whether this figure in the trial balance is an over- or an under-provision
!
Sorry for “spamming”, I was able to get the above doubts cleared while doing more questions from the revision kit. Nevertheless, thank you!
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