Dear John, I'm working on a number from one of the Mock Questions I bought online, I'm getting difficulty in understanding how the overdraft balance at year end was determined. Below is an excerpt from the question:
Financial Position as at March 31
• Overdraft $9.5 million
• Medium and long term borrowing $10.5 million
Additional information
The company pays an average interest rate of 7% per annum on each of its loans and overdraft. Interest is paid each year on the opening balance of the overdraft.
Suggested Solution
Overdraft at year end: Yr 1 = $7.67m; Yr. 2 = $4.8m7 and Yr. 3 = $1.18m
Interest Charged: Yr1 = $1.4m; Yr2 = $1.27m and Yr3 =$1.08m
My calculation generates:
Interest: Y1 $1.4m; Yr2 $1.30m & Yr3 $1.21m
I'll be most grateful for your advise.
Thanks.
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Determining Overdraft Balance at year-end
10y ago#1Are you sure that you have typed out the whole question?
Because if there is nothing else written in the question then the answer make no sense at all. (If you paid for the questions, do they not also provide answers ??)
I am sorry not to be of more help, but surely there is more in the question than you have typed out?
Dear John,
Yes, I have got the answers, however, due to work schedule, I couldn't attend the debrief webinar where I could have asked the question.
The full question is a page and half long, but all the information regarding the overdraft and debt is what I have provided here. The only missing part is "The company has set a financial target of repaying the overdraft using retained earnings within three years."
My approach using the amortised cost is not yielding the same answer as the model answer,
10y ago#3I am sorry, but I have no idea how they have arrived at the interest payments.
I thought that maybe they had assumed that the overdraft was being paid off in equal amounts over three years, but that doesn't come to their answer (and nothing in the question says that anyway!).
I can only suggest that you contact whoever supplied the question and ask them what they have done.
Many thanks John.
10y ago#5You are welcome (although I have not exactly been of any help :-( )
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