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The following trial balance extract relates to Howard at 30 September 20X5:
$000 $000
Convertible loan notes – Liability component at 1 Oct X4 (note (i)) 28,508
5% loan notes (note (ii)) 10,000
Equity investments (note (iii)) 6,000
The following notes are relevant:
(i) The convertible loan notes are 8% $30 million convertible loan notes issued on 1 October
20X4 at par. An equivalent loan without the conversion would carry an interest rate of 10%.
Howard’s finance director correctly split the instrument into its equity and liability
components at 1 October 20X4, but has done nothing else.
(ii) The 5% loan notes were issued at par of $10 million, but Howard incurred $400,000 issue
costs. The loan notes have an effective interest rate of 8%.
(iii) The equity investments relate to 1 million shares in Kapoor, an unrelated entity. During the
year, Kapoor paid a dividend of 10 cents per share. At 30 September 20X5 the fair value of
each Kapoor share was $7What income should be recorded in the statement of profit or loss in relation to the equity
investments?
A $600,000
B $1,100,000
C $1,600,000
D $1,000,000Dear Sir,answer is 1,100,000 but i can’t understand one point that,
why 1million$ is recognized as gain ??
Hi,
This is the gain in fair value of the equity investment. The 1 million shares were recorded at $6 million at the start of the year but are now worth $7 each at the reporting date. This gives a total fair value of $7 million ( $7 x 1 million shares) and a gain of $1 million ($7 million less $6 million).
Thanks
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