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Hi there,
RE: page 52 – Exam preparation question/solution 1
Please could you clarify the retained earnings adjustment?
Why have we deducted interest of £266K and added on issue costs of £200K?
Many thanks in advance.
Hi,
The issue costs should be included as part of the financial liability, where it should be initially measured at net proceeds. As they have expensed the issue costs then we need to remove then (CR Retained earning) and the other side of the entry would go to the financial liability (DR Financial liability).
This is quite a common scenario that is seen in exam questions, so try to ensure that you know the rules behind the issue costs and how to treat them for both a financial liability and financial asset.
The deducted interest of £266k is the finance cost incurred on the outstanding liability. This where we are charging the effective rate to the outstanding liability amount.
Thanks.
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