Two independent scenarios follow: a) Fan Co. issued a $750,000 four-year, zero-i

Question

Two independent scenarios follow:

a) Fan Co. issued a $750,000 four-year, zero-interest-bearing note to XYZ Corp. on July 1, 2017, and received $477,000 cash. The implicit interest rate is 12%.

b) On January 1, 2017, Watts Co. issued $6000 of 6% bonds that are due in 10 years. The bonds were issued to yield a market rate of 5% and pay interest each July 1 and January 1.

Assume the companies follow IFRS and have a Dec 31 year end. Required: For each independent scenario for the bolded company:

i) Which items and amounts would be shown on the CLASSIFIED statement of financial position at December 31, 2017 year end liabilities (clearly label account name, amount, and WHERE it would be presented. Show all calculations to support.)

ii) Calculate total 2017 interest/finance expense

Explanation / Answer

Answer a-i. Fan Co. Balance Sheet (Partial) As on Dec 31, 2017 Liabilities Long-Term Liabilities Notes Payable - Zero percent              750,000 Less: Discount on Issue of Note              244,380                              505,620 Answer a-ii. Interest / Finance Expenses                28,620 Note Payable Discount Amortization Schedule A B C D E Date Interest Paid - $750,000 X 0% Interest Expense - Preceeding Bond Carrying Value X 12% Discount Amortization (B - A) Unamortized Discount (D - C) Notes Carrying Amount ($750,000 - D) 7/1/2017                                    -                                   -                                      -            273,000                  477,000 12/31/2017                                    -                          28,620                           28,620          244,380                  505,620 Answer b-i. Table Value Based on n= 20 (10 Years X 2) i= 2.50% (5% / 2) Cash Flow Amount Present Value Interest - $6,000 X 3%                      180                                   2,806 ($180 X 15.58916) Principal                  6,000                                   3,662 ($6,000 X 0.61027) Issue Price of Bonds                                   6,468 Premium on issue of Bonds                                       468 Watts Co Balance Sheet (Partial) As on Dec 31, 2017 Liabilities Long-Term Liabilities Bonds Payable                  6,000 Add: Premium on Issue of Bonds                      431                                   6,431 Answer a-ii. Interest / Finance Expenses                      323 Bond Premium Amortization Schedule Date Interest Payment - $6,000 X 6% X 6/12 Interest Expense - Preceeding Bond Carrying Amount X 5% X 6/12 Premium Amortization Unamortized Premium Bond Carrying Amount A B C = A- B D = D - C E = $6,000 + D 1-Jan-17                                    -                                   -                                      -                     468                      6,468 30-Jun-17                                 180                              162                                   18                   449                      6,449 31-Dec-17                                 180                              161                                   19                   431                      6,431

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