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Interest on 15% convertible loan note (long term)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Interest on 15% convertible loan note (long term)

  • This topic has 3 replies, 2 voices, and was last updated 10 years ago by MikeLittle.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • January 31, 2015 at 8:23 am #224461
    Kyaw
    Member
    • Topics: 31
    • Replies: 37
    • ☆☆

    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!

    January 31, 2015 at 3:32 pm #224523
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23315
    • ☆☆☆☆☆

    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?

    January 31, 2015 at 4:30 pm #224529
    Kyaw
    Member
    • Topics: 31
    • Replies: 37
    • ☆☆

    Thank you very much, Sir! You make me clear.

    January 31, 2015 at 4:32 pm #224531
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23315
    • ☆☆☆☆☆

    You’re welcome

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