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why were the loan notes not armotised
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Dear Boniface,
If you look at the question very well, you will see that the loan note given is a figure for the parent, which is the balance as at year end in statement of financial position. There is no further information on it as to whether interest is yet to be paid, and moreover there would not have been such because we are not concerned with statement of profit or loss and other comprehensive income. At year end, it is assumed that the interest payable have been effected in the profit for the year. This is my explanation for this.
Regards,
Muyideen, F7 Student
Hi
I don’t remember the question but Muyideen’s answer seems viable. If Statements of Financial Position are given, is there a current liability in the parent for loan interest payable? If not, then we can only assume that interest HAS BEEN paid
Does that help?
I am not staisfied with the answer. The question question clearly stated that the loan note was not accounted and that is why if you check the suggested answer, the loan note was increased from $ 8000 to $9,500. I would appreciatte if you can check both question and answer before responding (F7 June 2013 Question 1). Below is part of the question
On 1 October 2012, Paradigm acquired 75% of Strata’s equity shares by means of a share exchange of two new
shares in Paradigm for every five acquired shares in Strata. In addition, Paradigm issued to the shareholders of
Strata a $100 10% loan note for every 1,000 shares it acquired in Strata. Paradigm has not recorded any of the
purchase consideration, although it does have other 10% loan notes already in issue.from the information you have given, we are not able to amortise the loan notes – there is no interest rate mentioned, no effective rate, no date of redemption. Is any of that information available?
Looking forward already to your response 🙂
What about the 10% ? ” Paradigm issued to the shareholders of Strata a $100 10% loan note for every 1,000 shares it acquired in Strata”. My assumption is that the effective inerest rate is same as the coupon rate?. If there will be no amortisation, then for subsequent measurement are you proposing to measure the loan note at fair value?.
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I think I understand Boniface’s concern. The 10% mentioned in “$100 10% loan note” is actual interest pricing that has nothing to do with the recognition of the initial purchase consideration. The $1.5million added to $8million in SFP is the purchase consideration of loan note issued for the acquisition.
If the question has gone further to require us of any redemption over a number of years, then an effective pricing rate would be provided and as such, we can amortize interest for the period of the year within which the company has been acquired.
This is what I feel would ordinarily have happened if such information was provided.
Regards,
Muyideen, F7 Student.
You’re right, Boniface, about the 10% – I missed it. Do we know the redemption date? Do we know the effective rate? Do we know anything more that would allow us to amortise?
Looking forward to your response 🙂
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