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Sir,
P2 12/09 Question:
A company borrow $47M on 1Dec2014 with interest rate at 5% and on 30Nov 2015, the company borrow additional liability of $45M with interest rate at 7.4%. Both repayable on 30Nov2019.
Question is to account the two loan under FVTPL on 30Nov2015.
In the answer, the initial loan is carried at $45M making a net profit of $2M by (unrealized gain of $49.35-$45=$4.35 minus interest expense of $47*5%=$2.35)
I don’t understand the reason why the new loan value will become the fair value of the old loan when their interest rate is different.
Please help.
Thanks
Hi,
It doesn’t matter that the interest rate on the loans is different, the key is that the amount to be repaid under both is identical on 30 Nov 2019. Therefore the loans are similar loans making the new borrowing the fair value of both, as if we were to borrow the old loan under today’s conditions then this would be its fair value, reflecting the current market rate of interest and the amount we could borrow.
Thanks
Hi Sir,
Just want to say thank you for your tutoring. I got a pass in SBR and am really appreciate all your help.
Thank You
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