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A company borrows 5% loan of $500,000 for 10 years. Then the company will pay $25000 interest every year shown on SOPL while the loan of $500,000 will be shown on SOFP for the rest of the 10 years.
I have few questions related to my example above such as:
1) Interest expense would be $25000 on SOPL every year for the rest of the 10 years?
2) Loan would be $500,000 as non-current liability on SOFP for the rest of the 10 years?
3) On repayment we will remove the $500,000 loan as non-current liability from SOFP and we will show it as expense for the year on SOPL?
Is that correct?
1. Correct
2. It will be a non-current liability until there is less than 1 year before the date of repayment. Then it becomes a current liability.
3. No!!! It is never an expense in the SOPL. When the loan is repaid we credit Cash and debit Loan, and the loan then disappears.
Have you watched my free lectures on this? The lecturers are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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