Page 191 - F3 -FA Integrated Workbook STUDENT 2018-19

Capital structure and finance costs

Loan notes and preference shares

4.1 Loan liabilities and finance charges

A limited liability company can raise funds by issuing loan notes i.e. fixed term loans.
The life of the loan note is fixed and must be repaid at an agreed point in time. The
issuer will also have to pay interest to the loan note holder. The interest is always
calculated based on the nominal value of the loan note (usually a %). The interest
incurred is included as a finance cost in the statement of profit or loss.

On issue of the loan notes the accounting entries are as follows:

Debit Cash

Credit Non-current liability

The annual interest charge is recognised as follows:

Debit Finance costs

Credit Cash/current liabilities (depending on if it’s been paid or incurred)

4.2 Redeemable and irredeemable preference shares

If the preference shares are redeemable they are treated the same as
loan notes. However if the preference shares are irredeemable, the
shareholding and associated dividends are treated exactly the same as
ordinary share dividends.

Illustrations and further practice

Now try question TYU 5 and TYU 6 from Chapter 13 of the Study Text.

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