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- This topic has 5 replies, 2 voices, and was last updated 3 years ago by Stephen Widberg.
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- August 17, 2020 at 1:03 am #580833
This is a question from December 2009 exam:
A company borrowed $47 million on 1 December 2008 when the market and effective interest rate was 5%. On
30 November 2009, the company borrowed an additional $45 million when the current market and effective
interest rate was 7.4%.Both financial liabilities are repayable on 30 November 2013 and are single payment
notes, whereby interest and capital are repaid on that date.Required:
Discuss the accounting for the above financial liabilities under current accounting standards using using fair value as at 30 November 2009. Please explain me the Fair value loss calculated I don’t understand it at allPV of cash flows at 30 nov X5
Loan 1= Carrying amount is 49.35 as at 30 nov x5
if we calculate fair value using new borrowing rate as change in rate effect FV it will give us
PV of interest= 1-(1.074^-4)/ .074 * 2.35 = 7.89
PV of principle= 1.074^-4*47=35.32
total= 43.21if we compare 49.35 and 43.21 there is decrease in liability of 3.78
why in question they are doing it in different way.
August 17, 2020 at 12:37 pm #580898This question was created 11 years ago when accounting for financial instruments at fair value was a new concept. The examiner was trying to get students to think about the different ways in which bonds could be valued and demonstrate some knowledge of present values in bond valuation.
If I remember it was the current issues question – this was an optional question which most students would never have attempted. As you know the structure of the exam totally changed two years ago when the exam became less technical and far more concerned with explaining in simple terms to stakeholders how financial statements work.
If you can find it in a current revision kit please let me know the reference and I will have a look at the numbers.
I cannot stress enough how important it is that you focus on the questions since the syllabus changed.
August 18, 2020 at 12:02 am #580971Hi thanks alot for your response
I would appreciate if you confirm my concept.
this is a question 57 in financial reporting issues in BPP Revision Kit.
August 18, 2020 at 8:43 am #580992What is the name of the question? I think you may be using last years exam kit.
August 18, 2020 at 4:18 pm #581065name of the question is complexity.
my kit was valid until 2020 June exams as attempt cancelled for June so I’m using same
August 18, 2020 at 5:27 pm #581082The best I can do is to give you my answer.
First explain that this would normally be accounted for using amortised cost but that there is an option to use fair value in certain circumstances.
Second state that using amortised cost the value of the old loan would be 49.35 at the 30th of November 2005
Third stated that the fair value of the same loan on the 30th of November 2005 would be 45 million because this reflects current interest rates.
I’m sure that is as far as any other candidate has ever gone! Please remember to keep your explanations very simple in the exam as you are explaining issues to management as opposed to an examiner. That’s because the style of the exam changed two years ago.
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