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In the answer to part a)in the proforma income statement,how have they calculated the interest payable in the future years?
It is the interest on the long-term borrowing at 8%, plus the interest on the short-term borrowing at 7%.
The short-term borrowing is a balancing future on the Statement of financial position each year (the question says extra borrowing is financed by overdraft). Also the question says that the interest if effective in the following year.
So….at the end of the year given in the question, short-term is 230 and long term is 580. So the interest payable next year is (230 x 7%) + (580 x 8%) = 62.5 (63).
As the short-term borrowing changes each year, so too will the interest in the following year.Sir,
On the above question, we’ve been asked to forecast the P/L and balance sheet. As per the question, the short-term borrowing will be the balancing figure. However, I cannot get the balancing figure until I have the reserves for the year, and I cannot have the reserves amount until i have the profit for the year. And to arrive at the profit, I need to know the net interest payable for which i need to know the short-term loan amount(which is the balancing figure) to consider its interest.
I don’t know if i am missing anything on the question, could you please help me on this?
Thank you.
What you have missed is note (vi) of the question.
It could have been worded more clearly, but it means that the interest is calculate on the balance at the start of the year.Hello sir, hope u r well.
About the interest payable, i cannot get the figures from the year 20X6 onwards. Does the short term borrowing change? And by hw mch?
Many thanks for your help.
As I wrote in my earlier reply, the interest is calculate on the short term borrowing at the start of each year (which is the balancing figure in the SOFP each year).
Dear sir,
I can somehow reconcile calculation for year 1 on net interest payment (63), but how would the interest payment in year 2 change to (65) ?
i am not sure neither to understand why investment remains flat at 32 on SOFP since it is said that investment in plant is done in line with sales. could you help clarify these 2 points ?thanks a lot in advance
The interest each year is 580 at 8%, plus interest at 7% on the short term loans at the start of the year (i.e. end of the previous year).
The question says that the investment in plant and machinery increases, and this has been increased in the answer. “Investments” on the SOFP are other investments (presumably shares in other companies) and there is no mention of this increasing.
Hello again Mr Moffat
As per my calculations, the balancing figure is 780, but this includes
1. ST loans and overdrafts
2. other payablesWe are given that other payables = $472m in 20X4, but no further information is given as to how this would change in the following years.
So how did they calculate ST loan as 266 and other payables as 514 in the SOFP?
Note (iv) of the question says that other creditors will increase in proportion to the increase in sales (so 8% next year, 7% the year after, and so on).
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