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If we are told that $30,000 6% loan note was issued on 31 May, 2013, in the trial balance it shows that $900 loan interest was paid on 30 November, 2013 and that, because of the large premium payable on redemption, the effective rate of interest is 8%, what will be the finance charge in the Statement of Profit or Loss for the year ended 31 January, 2014 where the company’s cost of capital is 10%?
how to solve this question?
and this is from which topic ?Where an asset is to be revalued, the following information is relevant:
This is the end of the asset’s seventh year Original cost $800,000 Depreciation for 7 years at 10% straight line $560,000 Asset to be revalued by $600,000 Estimated remaining useful life revised to 5 years.
What figure shall be debited to the Asset Account and what will next year’s depreciation charge be?This question also thanks
Loan note interest is the topic and you’ll find lots of examples in the mini exercises at the end of the free course notes!
How to solve it? Between date of issue and accounting reference date there is 3/4 of the year.
If the applicable rate had been the coupon rate of the note (6%) a full year’s charge would have been 6% x 30,000 = 1,800
The company has paid for the first 6 months’ interest (6% x 30,000 x 6/12) of 900 so now needs to accrue for the remaining 3 months to the year end and that would involve an accrual of 450
However, the applicable rate is not the coupon rate of 6%. The question tells us that the effective rate is 8%
8% x 30,000 for 9 months = 1,800 and that’s the appropriate amount to be shown as the finance charge in the statement of profit or loss
The double entry for this additional 900 is Dr Finance Charges 900, Cr Accruals Loan Interest 450 and Cr 6% Loan Account 450
Ok?
When revaluing an asset like this, the revaluation is not (as you may have thought) a revaluation of the ASSET – rather it’s a revaluation of the accumulated depreciation
Think about that for a moment – what has happened is that, with the benefit of hindsight, we can see now that we have charged too much depreciation in the previous 7 years
So the revaluation surplus will be first of all debited to the Accumulated Depreciation Account
That still leaves 40,000 (600,000 – 560,000) and that extra 40,000 will be debited to the Asset Account
Ok?
I understood the first Mcq question
still didn’t understand the revaluation MCQ
By asking What figure shall be debited to the Asset Account and what will next year’s depreciation charge be?
What do they mean by asset account ?
and can you explain the logic behind this ?why arent we using the normal method
dr. ppe
cr. acc dep
cr. revaluation reserveCost 800,000
Dep (7 yrs) 560,000Cv 240,000
revaluation @ 600,000 ( Increase of 360,000)
This should go to asset account
and the dep charge would be 600,000 / new life (5yrs)
what i feel
You certainly will not wish to CREDIT the accumulated depreciation account!
May I suggest that you open 3 T accounts (PPE, Accumulated Depreciation and Revaluation Reserve)
Put in the brought forward figures
In addition, you have misread the question in a BIG way!
The question states that the asset is to be revalued BY 600,000, not TO 600,000
Maybe that will make a difference to your thinking?
how to solve this question?
at the start of the year company had balances on its 25 C equity shares capital account and share premium of 560.000 and 285.000 respectively.
durring the year company issued bonus shares on the basis of 1 for 4 shares already held by capitalising part of its general reserves.
Later in the year, the company made a new issue of shares at full market price
at the year end there were balances on the share capital and share premium account 960.000 and 400.000
what price were tne new shares issued for and how much share premium was received on each new share?
thank you for your answer,
It looks like 36.057 cents per share issue price and that means a premium of 11.057 cents
Is that right?
Share capital increases by 140,000 and that comes out of general reserve, so now we have balances of 700,000 and 285,000 respectively
So new issue must be 260,000 dollars worth of shares at 115,000 dollars premium
That’s $375,000 worth raised by issuing 260,000 x 4 (because they’re 25 cent shares) shares
$375,000 / 1,040,000 shares = 36.057 cents per share
But they only have a face value of 25 cents so premium per share must be 11.057 cents
Ok?
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