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On 1 January 2005, the company made a loan of $12000 to an employee, repayable on 1 January 2006 charging interest at 2% per year. On the due date she repaind the loan and interest
What is the current assets?
Sir according to me I did Cr cash 12000, Dr Rec 12000 , and Dr Interest receivable and Cr Interest 240
So the current assets are 240, but the answer is 12240? but why? since when the comapny makes a loan accoridng to double entry they credit cash and dr rec
When a company lends money to one of its employees, the company will debit the asset account Loans to Employees and will credit the asset account Cash.
The portion of the balance in Loans to Employees that will be due within one year of the balance sheet date is reported as a current asset. The portion of the balance in that account that is not due within one year of the balance sheet date will be reported as a long term asset.
Interest on the loan should be accrued by the company and reported as other revenue. The company’s entry to accrue interest is a debit to the current asset Interest Receivable and a credit to Interest Revenue.
You have no idea what the cash balance is because there will have been lots of other cash transactions which are not mentioned in the question.
The questions does not simply say ‘what are the current assets’ – that would be impossible to answer because there is no enough information.
If asks for the current asset or current liability relating to those particular items. It does not ask for the cash balance, because again that would be impossible on the information given.(This was actually a past exam question!)
but sir it makes no sense! any one would technically cr cash and dr rec. they should have either mentioned or so. and i dont get the logic of that.
The question only refers to four items. What about all the other transactions that would have taken place during the year? Many of them would affect the cash balance.
I therefore repeat – it is impossible to know what the cash balance is at the end of the year and whether it is an asset or a liability. The question asks what the asset or liability is in respect of the items listed.
You may not like the wording, but it is examiners wording and is correct wording.
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