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Chapter 10

Example 1 cont.

On 1 January 20X5 a 5% loan note is issued for $5,000. The loan is
redeemable after three years at a premium of $487, giving an effective rate of
interest of 8%.

Required:

Show how the value of the loan note changes over its life.

Solution

This financial liability should be measured at amortised cost. The total
finance cost is equal to the total annual interest paid of $750 ($5,000 × 5% ×
3 years) plus the premium on redemption of $487, giving a total cost of
$1,237. This cost is spread over the three year period by using the given
effective rate of interest of 8%, and is best calculated by use of an amortised
cost table as shown.

Balance Interest Interest Balance
b/f @ 8 % paid on SFP

20X5 5,000 400 (250) 5,150
20X6 5,150 412 (250) 5,312

20X7 5,312 425 (250) 5,487
The interest at 8% represents the finance cost to be shown in the statement
of profit or loss each year, and the year-end balance is the balance that would
be shown on the statement of financial position.

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