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ACCA Applied Knowledge · Financial Accounting · Capital structure and finance costs

On 1 January 20X5 Tarn Co issued $1,000,000 of 4% loan notes at par, incurring issue costs of $40,000. The loan notes are redeemable at par after five years, and are measured at amortised cost with an effective interest rate of 5.5%. Interest is paid annually on 31 December. What is the carrying amount of the loan notes at 31 December 20X5?</br>

The carrying amount is $972,800. Net proceeds of $960,000 are increased by the effective finance cost of $52,800 (5.5%) and reduced by the $40,000 cash interest paid, so the issue costs are gradually unwound through finance costs.

  1. A$960,000
  2. B$972,800Correct
  3. C$1,000,000
  4. D$1,012,800

Explanation

Net proceeds are 1,000,000 - 40,000 = $960,000. Finance cost is 960,000 x 5.5% = $52,800. Interest paid is 1,000,000 x 4% = $40,000. Closing carrying amount is 960,000 + 52,800 - 40,000 = $972,800. $960,000 ignores the unwinding of the issue costs.

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