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Hi,
$40m loan notes issued at par on 1.10.12 No interest will be paid on the loan. However redeemed on 30.9.15 for $53,240,000 which gives effective finance cost 10%p.a (co y/e is 30.9.13)
I’m just wondering how do we account for this in the SOPL.
Do i just take 1.10x $40m = $44 for the CA.If q is silent on payment then we should just nil it right?
Whats the use of that $53 value then?I completed this question under the exam time limit manage to get 80% done. But only 70% are correct. I find that i mostly had a slightly reduced thinking processing over loan note, finance lease and provision.. other areas i’m so far okay. Need to speed up.
Any tips on how to get organized and manage speed with accuracy? by accuracy i mean reasonable accuracy.
Hi,
This is an example of a zero coupon bond, used by a company when the money used from the borrowing will not yield returns until later in the project’s/investment’s life, hence no interest being paid.
Accounting rules dictate that we need to charge interest on the loan at the effective rate, so the interest in the first year will be 10% of the b/f balance of $40m, giving $4m on the SPL and $44m on the SFP (DR Finance Cost CR Loan Notes). All we are doing is applying the amortised cost method.
In the second year we apply the 10% to the b/f balance which is now $44, and so the finance cost is not $4.4m.
If you continue this until the redemption date then you will find that the final balance on the SFP should equal the $53,240,000, which is then what is paid back to the investor. Try it and see how you get on.
Thanks
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