Querk plc prepares its financial statements to 31 December each year. On 1 January 2023 the company bought £500,000 of 6% loan stock for £490,420. Interest is receivable on 31 December each year and the loan stock will be redeemed on 31 December 2027 at a 15% premium. The effective rate of interest is 9% per annum and Querk plc intends to hold the loan stock until it is redeemed.
(a) Define the term "financial instrument". Explain why the loan stock referred to above falls within this definition.
(b) Define the terms "financial asset" and "financial liability". Explain why the loan stock is a financial asset for Querk plc but is a financial liability for the borrower.
(c) Identify the category of financial asset to which the loan stock belongs. Explain how financial assets of this type should be measured, both at initial recognition and subsequently.
(d) Calculate the amount of interest income that should be recognised in the financial statements of Querk plc for each of the years to 31 December 2023, 2024, 2025, 2026 and 2027. Also calculate the amount at which the loan stock should be shown in the statement of financial position at each of those dates.
(e) Explain why the accounting treatment required for this loan stock by international standards gives a fair measure of the interest income for each year.