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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 $8.5m is pro-rated.
Ignore the cash payment at 5% of the par value as that is not made until 30 June 20X9.
Try the question again using the detail given and see if you get the right answer.
Thanks
Hi Sir,
I am wondering since the question stated that the “issue cost is expensed within finance cost”, we just record 9m$ as the FV of the loan note & 0.5m$ is expensed in P&L.
This means the total exp regarding the loan notes in P&L is = 0.5m$ + 9m x 8% x 6/12 = 0,86m$I look forward to your reply soon.
Thank you!!
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