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Hi,
(i) On 1 January 20X7, Haverford Co issued 80,000 $100 4% convertible loan notes. The loan notes can be
converted to equity shares on 31 December 20X9 or redeemed at par on the same date. An equivalent loan
without the conversion rights would have required interest of 6%. Interest is payable annually in arrears on
31 December each year. The annual payment has been included in finance costs for the year. The present value
of $1 receivable at the end of each year, based on discount rates of 4% and 6%, are:
4% 6%
End of year 1 0·962 0·943
End of year 2 0·925 0·890
End of year 3 0·889 0·84As per the question Finance cost of $455 has to be debited to P&L.
But in Answers ($455-320) =$135 Debited to P&L and arriving to the total $3305 in Adjusted profit.
In the revision Video $455 added but we won’t be able to get the total of $3305 where the actual total is $2985.I am bit confused here as I have learnt
Finance cost 455 CR- Liability and DB- Finance Cost (P&L)
Interest paid 4320 CR- Cash Db – LiabilityCould you kindly explain me which would be the correct entry please?
Liability PV 6% Finance cost Interest paid
Y1 7,576 455 -320 7711
Draft profit 2,250
Convertible loan notes (w1) (135)
Contract revenue (w2) 5,600
Contract cost of sales (w2) (3,600)
Depreciation (w4) (720)
Property impairment (w4) (480)
Closing inventories (w5) 390
Revised profit 3,305Hi,
Yes, I believe that I should have taken the additional amount of interest required to the profit calculation as opposed to the full amount. A slight oversight on my behalf, apologies.
Thanks
Hi Sir – in Triage Co F7 Sept 2016 exam, – they take don’t take the additional amount of interest as the adjustment – here they have taken the finance cost at 8% as the adjustment. I’m confused – what is the correct way to adjust for convertible loan notes?
answers
https://www.accaglobal.com/content/dam/ACCA_Global/Students/fun/f7/s16_f7_a.pdfHi sir,
Same doubtInterest payment (note (i)) DB 2,400
Given in the trial balance.(i) Triage Co issued 400,000 $100 6% convertible loan notes on 1 April 20X5. Interest is paid annually in arrears on 31 March each year. The loans can be converted to equity shares on the basis of 20 shares for each $100 loan note on 31 March 20X8 or redeemed at par for cash on the same date. An equivalent loan without the conversion rights would have required an interest rate of 8%.
The present value of $1 receivable at the end of each year, based on discount rates of 6% and 8%, are:6% 8%
End of year 10.94 0.93
End of year 20.89 0.86
End of year 30.84 0.79
Answer
6%convertible loan notes
The convertible loan notes are a compound financial instrument having a debt and an equity component which must both be quantified and accounted for separately:Year ended 31March outflow 8% present value
$’000 $’000
20X6 2,400 0·93 2,232
20X7 2,400 0·86 2,064
20X8 42,400 0·79 33,496Debt component 37,792
Equity component(=balance) 2,208
–––––––
Proceeds of issue 40,000
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The finance cost will be $3,023,000 (37,792×8%) and the carrying amount of the loan notes at 31 March 20X6 will be $38,415,000 (37,792+(3,023–2,400))In the question they haven’t mentioned that the annual payment was transferred to finance cost. But in the the trial balance the note1 is given.
I deducted the amount given in trial balance and debited to Finance cost (3023-2400)= 632
But the answer is DB finance cost 3023 in adjusted profit for the year
Hi,
You need to look very carefully at this one with regards to the profit figure that we are adjusting to get to the final profit for the year figure. Here we are adjusting a profit before interest and tax, so regardless of what they have already charged in the accounts, it will not be included in this figure of $30,000.
To get to the final profit for the year figure then we will need to deduct the full amount of interest based on the 8% in our adjustment.
Thanks
Hi Sir,
This is a valuable note for students like me who failed to understand the question.
Thank you so much.
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