Coupon interest deducted

Hello Sir,

In the following question when they calculated the finance cost they deducted the paid coupon interest for the year ,why?

In this way they are reducing the finance cost ,doesn’t it that this should be reduced from interest payable not from the interest expense of the year,

Thanks,

——————————————————————————————————————–

Q

The following trial balance relates to Xtol Co at 31 March 20X4:
$’000 $’000
Revenue 490,000
Cost of sales 290,600
Distribution costs 33,500
Administrative expenses 36,800
Loan note interest and dividends paid (notes(iv) and (v)) 13,380
Bank interest 900
Right of use asset – leased property at cost 100,000
Plant and equipment at cost (note (ii)) 155,500

$’000 $’000
Accumulated amortisation/depreciation at 1 April 20X3:
Right of use asset 25,000
Plant and equipment 43,500
Inventories at 31 March 20X4 61,000
Trade receivables 63,000
Trade payables 32,200
Bank 5,500
Equity shares of 25 cents each (note (iii)) 56,000
Share premium 25,000
Retained earnings at 1 April 20X3 26,080
5% convertible loan note (note (iv)) 50,000
Current tax (note (vi)) 3,200
Deferred tax (note (vi)) _______ 4,600
757,880 757,880
The following notes are relevant:
(i) Revenue includes an amount of $20 million for cash sales made through Xtol Co’s retail outlets during the
year on behalf of Francais. Xtol Co, acting as agent, is entitled to a commission of 10% of the selling price of
these goods. By 31 March 20X4, Xtol Co had remitted to Francais $15 million (of the $20 million sales) and
recorded this amount in cost of sales.
(ii) Plant and equipment is depreciated at 12½% per annum on the reducing balance basis. All amortisation and
depreciation of non-current assets is charged to cost of sales.
(iii) On 1 August 20X3, Xtol Co made a fully subscribed rights issue of equity share capital based on two new
shares at 60 cents each for every five shares held. The issue has been fully recorded in the trial balance
figures.
(iv) On 1 April 20X3, Xtol Co issued a 5% $50 million convertible loan note at par. Interest is payable annually in
arrears on 31 March each year. The loan note is redeemable at par or convertible into equity shares at the
option of the loan note holders on 31 March 20X6. The interest on an equivalent loan note without the
conversion rights would be 8% per annum.
The present values of $1 receivable at the end of each year, based on discount rates of 5% and 8%, are:
5% 8%
End of year 1 0.95 0.93
2 0.91 0.86
3 0.86 0.79
(v) An equity dividend of 4 cents per share was paid on 30 May 20X3 and, after the rights issue, a further
dividend of 2 cents per share was paid on 30 November 20X3.
(vi) The balance on current tax represents the under/over provision of the tax liability for the year ended 31
March 20X3. A provision of $28 million is required for current tax for the year ended 31 March 20X4 and at
this date the deferred tax liability was assessed at $8.3 million.
Required
(a) Prepare the statement of profit or loss for Xtol Co for the year ended 31 March 20X4 (8 marks)
(b) Prepare the statement of financial position for Xtol Co for the year ended 31 March 20X4 (12 marks)

Answer
w(4)

Loan notes
$’000 $’000
PV of principal (50,000 × 0.79) 39,500
PV interest flows:
20X4 50,000 × 5% = 2,500 × 0.93 = 2,325
20X5 50,000 × 5% = 2,500 × 0.86 = 2,150
20X6 50,000 × 5% = 2,500 × 0.79 = 1,975
6,450
Debt component 45,950
Equity component (?) 4,050
Cash received 50,000
Liability component b/d 1.4.20X3 45,950
Effective interest (45,950 × 8%) 3,676
Cash coupon paid (2,500)
Liability component c/d 31.3.20X4 47,126