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15% convertible loan note ……………..18440
only loan interest 1000 is paid
I think the remaining interest of 1766 should be stated under the current liability but in the answer provided by my tuition provider, it is added into the 18440 and put the whole figure under non-current liability. Only Trial Balance is given and no other information regarding the loan is given. Please, help me, Sir!Your tuition provider is correct. This is an example of accounting for a financial instrument where the par value / nominal value / coupon rate attributable to the loan note is different than the (in exam wording) a realistic market rate
Let me guess, this is a $20,000 5% loan note issued that has a conversion option and valuers have researched and determined that a similar loan without the conversion option would command an interest rate of 15%
We need to discount the $20,000 to get the present value as at date of issuance and then, each year, calculate how much interest at 15% is due on that discounted figure. Deduct the $1,000 actually paid (5% x $20,000) and the remainder is then added to the brought forward figure of the increasing obligation
In your example, that’s $1,766 being added to the amount of $18,440
Is that ok?
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