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Chapter 10

Example 2 cont.

Solution

(i) The initial financial liability is to be measured at the present value of the
cash flows, discounted using the market rate of interest.

N.B. Do not use the rate of interest paid to discount the payments.

Discount Present
Year Cashflow factor @ 8% value
20X5 Interest paid: $5,000 × 5% = $250 0.93 233

20X6 Interest $250 0.86 215
20X7 Interest plus capital $5,250 0.79 4,147
——–

Liability 4,595

——–
The equity balance at inception will be $5,000 – $4,595 = $405.

(ii) Extracts from the financial statements year ended 31 December 20X5

Statement of profit or loss $

Finance cost ($4,595 × 8%) (368)

Statement of financial position $

Equity: conversion options 405

Non-current liability
Convertible loan 4,713
($4,595 + $368 – $250)
Liability is measured at amortised cost, so initial value plus effective (market-
rate) interest less interest paid.

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