On 1 January Linnet Co issued $10,000,000 of 3% loan notes at par, incurring issue costs of $400,000. The notes will be redeemed at a premium, giving an effective interest rate of 7.2%. What finance cost should be recognised in profit or loss for the first year?

Correct answer: A) $691,200

Explanation

The liability is first recognised net of issue costs: $10,000,000 - $400,000 = $9,600,000. Finance cost = $9,600,000 x 7.2% = $691,200. Only $300,000 is paid in cash. The difference of $391,200 increases the carrying amount, which builds up the redemption premium and spreads the issue costs.