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Could you please help me with question in task Glove in studybook.
I don’t understand the transaction
– Dr Non current liability Cr Equity 1,55 – why should we Dr NCL?
– Dr RE (fin costs) Cr NCL 0,48 – it is said in the book that interest has been paid and accounted for in fin. statement – does not it mean that we should not make this transaction?
Also I do not understand why don’t we put closing liability balance 28,93 into SFP?We have to take 1.55 out of ncl – it has been included in there at the face value of the loan. But the loan is a mixed instrument involving both loan and equity. I working 1 in the solution, you’ll see a calculation which shows the loan element to be 28.45 and so, by deduction, we can see the equity element is 1.55. That’s why we have to take 1.55 out of ncl and credit it to equity.
The interest has been recorded. At 6% on $30,000. So $1,800 has been recorded in the income statement as a finance charge. But the real, effective interest rate is 8%, and should be calculated on the true loan element of th mixed instrument. So, 8% based on $28,450 is $2,276. That’s the “correct” finance charge. $1,800 has already been recorded so now we need to increase the finance charge in the Statement of Income and add the $476 ( $480 according to the solution ) to the loan amount of $28,450. That gives us a loan account balance of $28,930 and this is the amount to be included in ncl on the Statement of Financial Position.
In fact, if we now consider the ncl, it’s made up of 45 + 2 + 3 from the question. But we’ve just transferred out ( and put into equity ) 1.55, so now we’re down to 48.45. But we’ve also added the “additional” finance charge of .48. Now we’re up to $48,930 as per the solution.
You ask why we don’t put the closing liability $28,930 into SFP. Well, we do! It’s included within the $48,930
Is that OK?
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