- This topic has 1 reply, 2 voices, and was last updated 8 years ago by
.
- Posts
https://opentuition.com/topic/liability-principal-interest/
Hello Mike
Continuing from the above link, the 20G is the interest for the life of the loan.
In the link above you mentioned:“Interest of $20,000?
Either:
Dr Finance costs $20,000
Cr Cash $20,000or
Dr Finance costs $20,000
Cr Loan / Bank Loan / Bank Overdraft $20,000 ”My question now is, since the 20G is for the life of the asset. The liability would be split between long and short term liability. So lets say its only 1,000 for the short term, then would i still record the full 20G as the finance cost expense in the p & l? i don’t think it would since that would not be the interest for that 1 year only……so then where does the other 19G go?
For year 1 the entries would be
Principal:
Dr cash 100,000
Cr Loan 100,000Interest
Dr loan interest (year 1 only) 1,000**
Cr Loan payable 20,000
** where does the 19G difference go?I love it when students ask questions a bit at a time – so over a period of maybe one month I get all the important facts and over that time my initial response is made to look silly!
Do we know in this question what is the company’s cost of capital?
Do we know how many years ahead is the redemption date?
Do we know the rate of interest that the lender is charging on the loan?
Why would we even consider accounting for the interest on the loan that is not yet accrued?
That’s like asking me whether we should expense the cost of an asset in one accounting entry for depreciation – because we know that over a period of years the entire cost of that asset will be expensed
Borrow the money:
Dr Cash $100,000
Cr Loan $100,000One year later, account for the interest:
Paid?
Dr Loan interest / finance costs $1,000
Cr Cash / Loan $1,000Not paid?
Dr Loan interest / finance costs $1,000
Cr Accruals / Loan $1,000Over the life of the loan the full amount of $20,000 interest will therefore be expensed
But this is not a good question and you’ll get nothing like this in the exam
The reason is because your scenario completely ignores the time value of money / company’s cost of capital
Instead, find a question that involves a company borrowing money over (say) a three year period where some of that borrowing is classified as equity and the balance not so classified is the present value of the loan element
OK?
- The topic ‘Liability principal & interest (2)’ is closed to new replies.