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Issue Three: On 1 January 2x5 SOLAR accessed two forms of debt finance in order to fund a planned business expansion. It was agreed that
Issue Three: On 1 January 2x5 SOLAR accessed two forms of debt finance in order to fund a planned business expansion. It was agreed that both financial liabilities should be measured at amortised cost. Details of each are provided below: 1. E/f 5 million loan The loan was granted to SOLAR by a bank on 1 January 2x5. On this date SOLAR paid a loan arrangement fee of /350,000 to the bank. The loan is repayable on 31 December 2x9. Interest is fixed at 5% per annum and is payable on 31 December each year. The bank has advised that the effective interest rate of this loan is 6.7%. SOLAR intends to use the loan to part-finance the purchase of a new asset; 2. E/E 2 million redeemable preference shares On 1 January 2x5, SOLAR issued /2 million of 7% redeemable preference shares at par value to existing shareholders. They will be redeemed ten years after the issue date at their issue price. It is not possible to redeem the preference shares at an earlier date. Divififnnds are payable on 31 December each year. No issue costs were incurred by SOLAR. Question 7 (i) Calculate the carrying amount of each financial liability as at 31 December 25; and 4 marks (ii) Prepare, in respect of the two financial liabilities, extracts from SOLAR's statement of profit or loss for the year ended 31 December 25 and statement of financial position as at that date; and 4 marks (iii) Explain, with reference to the appropriate international accounting standard, why the financial liabilities should be measured at amortised cost
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