Loan note(Loudon Co Sept/Dec 2020)

SSahil3y ago

A 5% loan note was issued on 1 October 20X7 at its face value of $5m. Direct costs of the issue amounted to $0.125m and were charged to profit or loss. The loan will be redeemed in five years' a time at a substantial premium which gives an effective interest rate of 8%. The annual repayments of $250,000 ($5m at 5%) are paid on 30 September each year. 1 Oct, X7: 4875 Finance Cost:390 Repayments:(250) Balance at 30 Sept, X7:5015 Balance at 1 Oct, X8:5015 Finance Cost:401.2 Repayment:(250) Balance at 30 Sept, X8:5166.2 Payments are made in arrears as accounts close on 30 Sept(given in full question) Current aspect of loan note: 5015-5166.2 = -151.2 Non-current aspect of loan note: 5166.2 In accordance of IAS 1 My question is my solution right or is it wrong. In the sample solution(Loudon Co(Sept/Dec 2020)) they have not separated current and non-current aspects. And if the solution is correct how do you account for the current aspect of loan note?(like show it in current asset?)

P2-D2Tutor3y ago#1

Hi, The loan notes are redeemable in four years' time so they will be classified as non-current. Why? The loan notes will not be realised (paid) in full until after 12 months and so the entire amount is classified as non-current. This is always one to watch out for. Thanks

SSahil3y ago#2

Why does the same logic not apply to Leases. Leases are split into current and non-current even though lease are also not paid in full until the end of the lease period. When accounting for both leases and loan notes: Finance charge is added to liability and deducted from P/L Repayments are deducted from liability But only leases are split. I am not completely satisfied by your logic that its because they are not paid in full until after 12 months because same should then apply to leases I am have a different reason(which is some what similar to your logic), tell me what you think about it. Reasoning:The reasons loan notes are not shifted to current liability is because no principal amount is repaid until the loan notes mature(the repayments only include interest), as oppose to in leases in which some principal amount is repaid with every instalment. Let me know if incase you were saying the same thing and I some how misunderstood it

P2-D2Tutor3y ago#3

Mr. Personable, I like your thinking and the comparison to the treatment of the lease liability and I think that you've answered your question at the end of your post. For the loan notes the $250,000 that is being paid is the coupon interest (5% x $5m) and as you say is not paying the actual loan notes themselves, so the principal amount is not being paid until the redemption date in a few years time. The loan notes are therefore classified as non-current in their entirety but if the interest hadn't been paid for some reason then this interest amount would be accrued as a current liability. For the lease liability we are paying an amount each period that is, as you say correctly, paying the interest but also the capital, unlike with the loan notes. The lease liability is therefore split into current and non-current. So, just keep an eye out in the exam for where we have loan notes as we wouldn't expect to see them as current, unless that is they are being redeemed in the next 12 months..............

ZZoltan2y ago#4

Hi, Another question to this. Why aren't we discounting the loan when calculating the liability? We will pay 5 mil in 5 years time, and also 250k as interest annually, so why is the CV not in present value? Thanks in advance

P2-D2Tutor2y ago#5

Hi, It specifically says within the question that the loan notes were issued at par and so no discounting is required as we recognise the loan notes at the proceeds received. Thanks