ACCA FR · Chapter 7 · Question 8 of 10
On 1 January Kite Co issued $2,000,000 of 5% convertible loan notes at par, redeemable at par after 3 years. The initial liability component was $1,845,374. The effective rate is 8% and annual interest of $100,000 is paid in arrears. What is the carrying amount of the liability component at the end of the first year? (Round to the nearest dollar.)
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) $1,893,004
Explanation
Finance cost = $1,845,374 x 8% = $147,630. Closing liability = $1,845,374 + $147,630 - interest paid $100,000 = $1,893,004. The equity component is not remeasured. The liability builds up to $2,000,000 by the redemption date.
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