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Good day Sir,
Kindly assist on the question below. My problem is that I treated the debenture as financial asset because the debenture is acquired (assumed a creditor) therefore, add transaction cost to the discounted amount. However, the solution to the question was treated by deducting $5000 transaction cost from $475,000.
Answer is (A) while my answer is $493,600.
Please advice where I got it wrong.
Thank you.7. TD acquired a 4% $500,000 debenture at a discount of 5% on 1 April 2014, incurring
directly attributable transaction costs of $5,000. The effective rate of interest on the
debenture is 7%.
What amounts should be shown in the statement of financial position of TD
at 31 March 2015?
A. $482,900
B. $489,250
C. $513,250
D. $515,000Within the question you have twice mentioned the entity “TD”
Are you 100% certain that both references to TD are as per the question?
If you were being asked to provide the figure in the statement of financial position of the issuing entity, then I can comfortably see $482,900
But the way you have posted it I can only think that an error has been made in the question
OK?
Thank you for your prompt response.
The question was correctly posted as I copied and pasted from a revision mock question paper. The “TD” entity was mentioned twice.
Sir, my question here is that, should transaction cost be deducted from debenture cost as treated in the question and why?
Solution from the mock paper
£500,000@95%=475,000- £5000 (less transaction cost)= 470,000470000*7% =32,900. 5000
470,000+32,900-20000=482,900
My calculation
500000@95%=475,000+5000 (add transaction cost being financial asset)
I.e 480,000*7%=33,600. 500,000@4%=20,000
Answer is 480,000+33,600-20,000=493,600
The only reason I did not arrived at the given answer is because I added the transaction cost .
Thank you for your time.
I fully understood everything that you had written but was struggling to arrive at the figure $482,900 from my interpretation of the question
I previously wrote that I was comfortable with the figure $482,900 and I can arrive there very easily (as you have also now posted)
The only thing that I can suggest is that the wording “… Acquired a 4% ….. Incurring costs of …” is meant to be taken as the $475,000 already includes the $5,000 costs
Thus the debenture itself cost $470,000, the costs were $5,000 and the full amount was $475,000 … representing a discount of 5%
That’s the only way it makes sense to me
But if that’s the case then it’s a poor question
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