Nkumedinakachukwu Farms Plc has been operating in Awka, a town in South-East Nigeria since 2010. On 1 January 2017, Nkumedinakachukwu Farms Plc issued ₦50,000,000 4% 5 year loan notes. The loan notes were issued at a discount of 10 percent. They will be redeemed after four years at a premium of ₦50,000,000. The effective rate of interest is 9 percent. The transaction costs amounted to ₦2,500,000.
Required:
i. How should Nkumedinakachukwu Farms Plc recognise the financial instrument resulting from its issue of loan notes? Give reasons for your answer.
ii. Why should the loan be classified and accounted for based on the amortised cost method?
iii.At what amount will Nkumedinakachukwu Farms Plc initially measure the loan in its financial statements?
iv. Apply the amortised cost method to estimate the amount at which Nkumedinakachukwu Farms Plc will account for the loan in its financial statements?
Suggested answer to practice activity 20.8
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