Xtol(6/14)ammended

The loan note ia a ‘mixed instrument’ and includes an element of loan and a smaller element of equity

What you need to do is find the loan element and then, by deduction, arrive at the equity element

To find the loan element you need to calculate the present value of all the cash flows associated with that loan

These are 3 years of loan interest and a repayment of the face value of the loan in 3 years’ time

(I assume that you can do that and arrive at the total value of $45,950 representing the present value of all the cash outflows associated with this $50,000 loan)

The year’s loan interest has been accounted for (5% x $50,000 = $2,500) and is included within the figure of $13,380 in the trial balance (you can work out the figures for the two dividend payments and deduct those from the $13,380 to arrive at $2,500 loan interest)

If $45,950 is the loan element then $4,050 ($50,000 – $45,950) must be the equity element and that will appear as a separate component of equity on the statement of financial position

The effective rate of loan interest (not the coupon rate) is 8% and 8% of $45,950 is $3,676

That’s the ‘correct’ figure for the finance costs relating to the loan

But $2,500 of that has already been recorded as having been paid out

So the difference of $1,176 needs to be rolled up into the value of the loan giving us a total of $47,126 ($45,950 + $1,176) long term liability on the statement of financial position

Is that OK for you now?