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Hi Mike,
Hope you could help me on this:
Trial balance:
8% loan notes $20,000
Loan note interest paid $800
Suspense account $5,800Note:
On 31 March 2015, one quarter of the 8% loan notes were redeemed at par and six months outstanding loan interest was paid. The suspense account represents the double entry corresponding to the cash payment for the capital redemption and the outstanding interest.Finance cost= 0.08*20,000= 1,600
Carrying amount of loan note in SOFP, as given by the answer:
$15,000Carrying amount of loan note in SOFP, in my answer:
$15,800**(1,600-800)+ (20,000-5,000)
Why isn’t the interest to be paid added to the carrying amount of loan notes?
Because, in this example, the loan note is for $20,000 (now reduced to $15,000) and is a long-term liability whereas the interest, paid every 6 months, is a current liability
To remove the Suspense Account we need to:
Dr Loan Account $5,000
Dr Finance Costs $800 (the outstanding loan interest)
Cr Suspense Account $5,800This is not the same as a loan taken where the interest rate is artificially low, the loan is to be repaid at a premium and the examiner tells you what the effective rate of interest is.
This is a different kind of problem!
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