AACSB Learning Outcomes: BASIC
Alpha Co decides to issue loan notes to fund its next stage of expansion. It decides to issue
£2,000,000 of 5 year, 10% loan notes, with a face value of £1,000 for each loan note.
They are issued on the 1st January 2022, at a discount of 10%, and issue costs of £15,000 are
incurred upon their launch.
The company will repay the loan notes at the end of the five-year period for a 10%
premium.
What is the opening liability balance of the loan notes to be shown in the Company’s
Statement of financial position as at 1st January 2022?
2 Marks
(b) What is the total amount to be repaid to the owners of the loan notes over the life of
the financial instrument?
2
Marks
(c) What will be the charge to interest in the P&L, and the balance shown in the SOFP, for
the loan notes for the year ending 31st December 2022, if the implied interest rate is
14.75%?
2
Marks
(d) What is the final (balancing) amount of interest to be shown in the P&L relating to the
loan notes for the year ending 31st December 2026?
2
Marks
(e) Can you give 3 examples of what IAS 32 might class as financial assets and 3 examples
of financial liabilities? What types of assets and liabilities are generally not classed as a
financial instrument?
10
Marks
(f) Can you explain why ordinary shares are not classed as a financial liability for a
company, and instead are classified as an equity instrument?
7 Marks
AACSB Learning Outcomes: Intermediate
On 1 July 2014 Supertubes plc issues €50 million of convertible bonds to Magnatubes plc.
The bonds have a life of three years, a face value of €10.00 each, and they offer interest,
payable at the end of each financial year, at a rate of 8 per cent per annum.
The bonds are issued at their face value and each bond can be converted into two ordinary
shares in Supertubes plc at any time in the next three years. Organisations of a similar risk
profile have recently issued debt with similar terms, but without the option for conversion.
The market requires a rate of return of 10 per cent per annum on such securities. It is
considered that investors in Supertubes plc are prepared to take a lower return (8 per cent)
as a result of the facility to convert the bonds to equity.
(a) Provide the journal entries to account for the issue of the securities
(b) Provide journal entries for the payment of the first year’s interest
marks
AACSB Learning Outcomes: Difficult
With reference to the Supertubes question above:
8 marks
7
(a) Provide the journal entries for the CONVERSION of the securities into an equity
instrument, if the conversion of all the securities takes place TWO YEARS after the
bonds are issued
10 marks