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Sorry for returning back to the same question.Could you please look at below problem and explain the following:
800 loan interest paid represents expense.In calculating current charge to SOPL we take only 2400 (6%effective rate by 80000 and half year as loan was issued 1.04.2007).My question is in contrast with income tax, we do not consider that balance of 800, right?i think, 800 represents expense which was not paid but in case of tax the b/f balance represents over/under provision.Is this right?The following trial balance relates to Llama, a listed company, at 30 September 2007:
$000 $000
Land and buildings – at valuation 1 October 2006 (note (i)) 130,000
Plant – at cost (note (i)) 128,000
Accumulated depreciation of plant at 1 October 2006 32,000
Investments – at fair value through profit and loss (note (i)) 26,500
Investment income 2,200
Cost of sales (note (i)) 89,200
Distribution costs 11,000
Administrative expenses 12,500
Loan interest paid 800
Inventory at 30 September 2007 37,900
Income tax (note (ii)) 400
Trade receivables 35,100
Revenue 180,400
Equity shares of 50 cents each fully paid 60,000
Retained earnings at 1 October 2006 25,500
2% loan note 2009 (note (iii)) 80,000
Trade payables 34,700
Revaluation reserve (arising from land and buildings) 14,000
Deferred tax 11,200
Suspense account (note (iv)) 24,000
Bank 6,600
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471,000
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471,000
–––––––Dear Chris,
I looked through the text once more and realized that this 800 represent loan interest paid.So, 2400 is expense amount and 2400-800 =1600 will be added to Liabilty amount.
My question is, is it right to suppose that if it is written that the amount is paid then its not expense for previous period?Because logically i think if this is Loan interest Debit then it is interest expense.Hi,
The tax balance is the over/under provision. The interest paid is likely to have been expensed but it relates to the loan notes that should have been held at amortised cost. Any interest paid on the loan notes would therefore reduce the value of the liability. The interest expense is then based upon the effective interest.
Thanks
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