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Transaction costs

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FR Exams › Transaction costs

  • This topic has 1 reply, 2 voices, and was last updated 7 years ago by MikeLittle.
Viewing 2 posts - 1 through 2 (of 2 total)
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  • May 31, 2018 at 8:54 am #455042
    annamalai27
    Member
    • Topics: 29
    • Replies: 6
    • ☆

    When we are raising a loan we will record it at its PV of future cash outflows right? I have a few question, just want to be sure if i have understood it correctly..

    1. I raise a loan of 1m $ and i will have to redeem it at 1.5m $ in 4 years time (no interest expenses incurred in between. Discounting rate is 10%,so the value i record in my SOFP will be 1.02m $.

    I have received cash of only 1m$ but i am recording the value of loan as 1.02m$, where will the remaining .02$ be recorded?

    2. I raise a debt of 1m $ and i will redeem it at 1.5m $ coupon rate being 6%.

    2a. If Effective rate of interest is given
    Then we record the loan at 1m $ itself and increase the value of this 1m $ by the difference between the (( effective interest * 1m ) – ( 6% * 1m)) and record (Effective rate * 1m) as interest in P&L and (6% * 1m) will be taken of from cash.

    2b. If effective rate is not given
    Then we take a appropriate discount rate and calculate the PV future cash flows and then record the PV in the books.

    In short, basically my question is

    When should we use Effective rate and when should we calculate the PV of the future cash outflows .Have i understood this correctly or is it that in 2b we will have to calculate the effective rate of interest and then proceed as per 2a itself? Also effective rate of interest is equal to the cost of debt right?

    May 31, 2018 at 10:55 am #455056
    MikeLittle
    Keymaster
    • Topics: 27
    • Replies: 23321
    • ☆☆☆☆☆

    1 – Finance expense

    2a – yes

    2b – yes

    “When should we use Effective rate” – when we are given the information

    In practice, we would have to calculate the effective rate

    “Also effective rate of interest is equal to the cost of debt right?” – no. Effective rate takes in other considerations like, for example, the value attributable to any conversion rights, if applicable

    OK?

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  • The topic ‘Transaction costs’ is closed to new replies.

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