Sandown Dec 09

Do you see in the trial balance the line “Equity option 2,000”?

That’s the option element of the loan and is refers to in the note 2) as “the value of its conversion option”

Now, we know that the proceeds of the loan issue were $20 according to the question and if 2,000 is the value of the conversion option, then 18,000 must be the value of the loan

8% of 18,000 is 1,440 and that is the appropriate finance charge in the statement of profit or loss. Of this amount, 1,000 has been paid as interest (5% x 20,000)

So the adjustment necessary is to debit finance costs and credit….what?

Credit the loan account with this missing 440.

Now all of that happened last year and gives us the trial balance loan account value of 18,440

This year, same again. 8% of 18,440 is 1,475

Of this amount, 1,000 has been paid as loan interest (shown in the trial balance) so the adjustment this year is debit finance costs in the statement of profit or loss and credit the loan account, taking that balance up to 18,440 + 475 = 18,915

Next year, 8% x 18,915 = 1,513. 1,000 is paid by cash

The difference of 513 is added to the loan account ….. and so on until reception date in 2012

Ok?