Fairclough plc borrowed 10 million from a bank on 1 January 2011. Fees of 100,000 were charged

Question:

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?

Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...