Sir this question is also in kaplan kit.
The question was that Landing is considering acquisition of Archway. Summarized financial statement of Archway for y/e 30 Sept 20X6.
In Current liability 4% loan notes redeemable (1 Nov 20x6) of 10,000 is given in SOFP
In additional notes, its mentioned that 4% loan notes have been classified as a current liability due to their imminent redemption. As such they should not be treated as long term funding. However, they will be replaced immediately after redemption by 8% loan notes with same nominal value, repayable in 10 year's time.
The requirement is to restate finance cost
In solution they have they taken loan interest as 10000 x 8% = 800
But sir in my opinion it should be apportioned by 11/12 because the question stated that 4% loan notes which are redeemable on (1 NOV 20x6) will be replaced immediately after redemption by 8% loan notes with same nominal value, repayable in 10 year's time.
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Landing Dec 16
6y ago#1Hi,
The question states that it wants the adjusted finance cost, which you think may be appropriate for comparability purposes. It is this last part that is key as if we are to acquire the company then we wouldn't be interested in the historic finance cost, but the cost to be incurred in the future once the loan notes have been replaced, as this will aid comparability.
Thanks
Sir but in Qs it says that 4% loan notes have been classified as a current liability due to their imminent redemption. As such they should not be treated as long term funding.
However, they will be replaced immediately after redemption by 8% loan notes with same nominal value, repayable in 10 year’s time.
Sir these 4% loan notes will be redeemed on 1 Nov 20x6 and then they will be replaced with 8% loan notes with same nominal value, repayable in 10 year’s time. So til 30 september 20x7, instead of 12 months, 11 month interest should be taken as finance cost?
6y ago#3No, because they are looking at the cost in the future and in the future this will be 12 months at the new rate of interest.
Thanks
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