A company issues 8% loan notes at their nominal value of $30,000 with an effective rate of 5%. The loan notes are repayable at par after 4 years. What amount will be recorded as a financial liability when the loan notes are issued? What amounts will be shown in the statement of profit or loss and statement of financial position for years 1–4?
Question
A company issues 8% loan notes at their nominal value of $30,000 with an effective rate of 5%. The loan notes are repayable at par after 4 years. What amount will be recorded as a financial liability when the loan notes are issued? What amounts will be shown in the statement of profit or loss and statement of financial position for years 1–4?
Solution
When the loan notes are issued, the financial liability recorded will be the nominal value of the loan notes, which is $30,000. This is because the loan notes are issued at their nominal value.
For the statement of profit or loss:
Each year, the company will incur interest expense on the loan notes. This is calculated as the nominal value of the loan notes multiplied by the effective interest rate. So, the interest expense each year will be 1,500.
For the statement of financial position:
At the end of each year, the carrying amount of the loan notes will be the same as the initial recognition, which is $30,000, because the loan notes are repayable at par. The interest expense will be shown as a liability in the statement of financial position.
So, for years 1-4, the statement of profit or loss will show an interest expense of 30,000 each year.
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