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

Which statement correctly describes how interest on loan notes is treated in the financial statements of the issuing company?

Loan note interest is a finance cost recognised in profit or loss on an accruals basis, whatever the payment date. It is not a dividend or an equity distribution, because the holders are lenders rather than owners of the company.

  1. AFinance cost in profit or loss, regardless of when the cash is paidCorrect
  2. BDeducted from retained earnings as a distribution to the holders
  3. CCharged directly to equity because loan notes are a form of finance
  4. DCapitalised in the carrying amount of the loan notes only

Explanation

Loan note interest is an expense accounted for on an accruals basis and shown as a finance cost in profit or loss. It is not a distribution of profit as dividends are. Treating it as a deduction from retained earnings confuses debt with equity.

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