Fairclough plc borrowed €10 million from a bank on 1 January 2011. Fees of €100,000 were charged by the bank which were paid by Fairclough plc at inception of the loan. The terms of the loan are:
Interest
● Interest of 6% until 31 December 2013
● Interest dropping to 5% from 31 December 2013 to 31 December 2015
Repayment schedule
● Repayment of €5 million on 31 December 2013
● Repayment of €5 million on 31 December 2015
Interest is paid annually in arrears.
The effective yield on the loan is 6.07%.
Required:
(a) What is the total finance cost on the loan over the five-year period?
(b) What will be reflected as a liability in the financial statements for each 31 December year-end and what interest costs will be recognised in the statement of comprehensive income?