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The 5% loan notes were issued for $9m on 1 July 20X8. Diaz Co incurred issue costs of $0.5m associated with this, which have been expensed within finance costs. The loan note interest is payable each 30 June and the loan note is repayable at a premium, giving them an effective interest rate of 8%.
In respect of the 5% loan notes, how much should be expensed within Diaz Co’s statement of profit or loss for the year ended 31 December 20X8?
1. $0.68m
2. $0.45m
3. $0.72m
4. $0.34mThe answer to this question is Option 4, but I’m not getting how! Could you please help me out.
Hi,
How are you treating the issue costs? They are net-off against the proceeds of $9m, so our starting point is $8.5m.
You then need to be careful as the loan notes were issued on 1 July X8 and the question has a reporting date of 31 December 20X8, hence 6 months since they were issued. Any interest at 8% on the outstanding amount of $8.5m is pro-rated.
Ignore the cash payment at 5% of the par value as that is not made until 30 June 20X9.
Try the question again using the detail given and see if you get the right answer.
Thanks
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