- This topic has 3 replies, 3 voices, and was last updated 7 years ago by
.
- Posts
Q: The company issued a $25 million 6% loan note on 1 October, 2011. Issue costs were $1 million and these have been charged to
administrative expenses. The loan will be redeemed on 30 September, 2014 at a premium which gives an effective interest rate on the
loan of 8%.
What finance charge will appear in the statement of profit or loss for the year ended 31 March, 2012?The answer is:
24m @ 8% = 1.92m
24m @ 6% =1.50m
Difference 420,000
Dr Loan interest (finance charges) 420,000
Cr 6% loan account (liabilities) 420,000
Loan interest in the profit or loss account 192,000
6% loan on statement of financial position 24,420,000I don’t understand how the figures for P/L and SoFP have been calculated. Also, when calculating the F.C paid for the first year, shouldn’t we multiply 6% by 25m to get 1.5m?
Thanks
$25,000,000 loan note issued incurring $1,000,000 issue costs
So show the loan at $24,000,000 (net of those issue costs that were incorrectly included within cost of sales)
Effective interest rate is 8%, actual interest rate is 6%
Book value of loan is now $24,000,000, face value of loan is $25,000,000
8% x $24,000,000 = $1,920,000 = finance costs (loan interest for the year)
6% x $25,000,000 = $1,500,000 interest paid in the year
$1,920,000 – $1,500,000 = $420,000 difference that has been debited to profit or loss (within the figure of $1,920,000) and now needs to be credited to the loan account
The loan account WAS $25,000,000 but has been reduced by the write off of $1,000,000 loan note issue costs down to $24,000,000
Now that figure is being increased by the difference between the profit or loss expense of $1,920,000 and the amount actually paid of $1,500,000
So the double entries are:
Dr Finance costs $1,500,000
Cr Cash $1,500,000
with the interest actually paidDr Loan account $1,000,000
Cr Administrative expenses $1,000,000
with the $1,000,000 issue costs wrongly charged to administrative expenses instead of to the loan accountDr Finance costs $420,000
Cr Loan account $420,000
with the difference between effective rate interest and actual intest paidDoes that make it any clearer?
Hi,
I can’t understand why not always the full interest amount is recorded in P/L account. I will use another example:
”
On 1 April 20X3, Xtol issued a 5% $50 million convertible loan note at par. Interest is payable annually in
arrears on 31 March each year. The loan note is redeemable at par or convertible into equity shares at the
option of the loan note holders on 31 March 20X6. The interest on an equivalent loan note without the
conversion rights would be 8% per annum.Answer:
Liability component b/d 1.4.20X3 45,950
Effective interest (45,950 × 8%) 3,676
Cash coupon paid (2,500)
Liability component c/d 31.3.20X4 47,126
Adjustment required:
DR Finance costs (3,676 – 2,500) 1,176 —> this amount has been included in P/L
CR Loan notes 1,176 ”My question is why the recorded amount in finance cost is net (interest expense – actually paid interest). Where is the difference once the entire amount is recorded in P/L and in another example only the net amount?
It isn’t just the net amount that is taken to the statement of profit or loss.
The $1,176 in this example is the adjustment. The 5% of $50,000 ie the $2,500 interest actually paid is also in the statement of profit or loss as a finance charge but we need to make that adjustment of $1,176
Does that make it any clearer?
- The topic ‘Loan interest’ is closed to new replies.