Question 1 Red plc, a public limited company, providing construction services to the market and is based in the United Kingdom. The company has grown significantly over the years and is currently preparing its financial statements for the year ended 31 December 2020. Red plc requires advise on the following transactions: 1) Red plc acquired a 10% holding in the ordinary share capital of Blue plc for 500,000 on 1 December 2020, the value of the investment in equity instrument increased in value to 600,000 at the year end 31 December 2020. The intention of the directors is to hold shares as a long term investment. 2) On 1 January 2020, Red plc issued 50,000 of 8.5% loan stock at a discount of 1,865. Interest will be paid on 31 December each year and the stock will be redeemed at par on 31 December 2022. The effective interest rate is 10% per annum.

Required: d) Explain to the directors using calculations how the effective interest rate discounts the value of the loan stock back to the initial carrying amount. (3 marks are available for the calculations). [5 marks]