CASE #003IFRS 9
The Loan That Wasn’t as Cheap as It Looked.
A 4% coupon looks cheap. Then someone remembers the US$25,000 in fees.
01The situation
Year-end close · Apex Manufacturing
Apex Manufacturing needs to finance a new production line. The bank offers a US$1,000,000 loan with a 4% annual coupon and a five-year term.
MIKE — CEO
“Four percent. We got cheap money.”
EMMA — CFO
“Not exactly. We paid US$25,000 in fees to get it.”
Leo books the fees as an expense on day one. Sarah asks whether that is really right.
| Nominal amount | US$1,000,000 |
|---|---|
| Net cash received | US$975,000 |
| Transaction costs | US$25,000 |
| Coupon | 4% a year, paid annually |
| Term | 5 years |
| Principal | Repaid at the end of year 5 |
| Classification | Amortised cost |
02Your mission
Find the real cost of the money.
- Determine the initial carrying amount of the liability.
- Calculate the effective interest rate.
- Build the five-year schedule.
- Determine year-one interest expense.
- Prepare the entries for inception and year one.
- Explain why the 4% coupon is not the effective cost.
03Think first
What would you do?
Every case asks for your answer before it shows you the solution. Getting it wrong here is part of the method.
04The solution
This is how the solution starts. The rest is in the full case.
STEP 1 · INITIAL MEASUREMENT
1,000,000 − 25,000
US$975,000
Effective rate, five-year schedule, year-one entries, maturity and the reconciliation to the fees.
Unlock for $9.90What’s included
Everything you need to solve it.
- PDF caseThe story, the facts and the questions.
- Excel modelFive years, with the rate calculated by formula.
- Complete solutionStep-by-step reasoning, not just the final number.
- Journal entriesInception, annual interest and maturity.
- Common mistakesThe ones Leo would make. And probably you too.
- Final challengeA loan modification: extension, lower coupon and a new fee.
WHAT YOU’LL PRACTISE
Preview
A look inside.
- p. 1Cover
- p. 3The Case
- p. 7The Solution
- p. 10Journal Entries
In this case
- Mike, CEOThinks 4% is the cost.
- Emma, CFORemembers the fees.
- Leo, Junior AccountantExpenses the fees on day one.
- Sarah, AuditorQuestions the day-one expense.
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