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Hi Sir,
“A bank overdraft facility of $30,000 is available under an agreement with the bank which extends 2 years.” Does this mean the overdraft is payable in 2 years?
No. Generally an overdraft can be repaid whenever you want to reply it (or the bank can demand repayment whenever they want). In this case the bank has agreed that they will not demand repayment within 2 years, but it doesn’t stop the company repaying sooner if they want to.
Also, an overdraft facility means that the bank will let them borrow up to a maximum of $30,000, but that doesn’t mean that they will always be borrowing the full amount. The amount they are overdrawn is likely to change from day to day – it is simply a negative bank balance – but the bank is not allowing the overdraft to get any bigger than $30,000.
Hi Sir, your explanation is very clear. Thankx!
I have another question on Kaplan Exam Kit.
Argonaut Co issued $400,000 12% loan notes for $380,000 on 1 August 20X6.
What accounting entries are required in the year ended 30 September 20X6?Dr Cash $380,000 And Dr Interest $8,000
Cr Non?current liabilities $380,000 Cr Current liabilities $8,000The given explanation is as below:
“Loan notes can be issued at a discount to their nominal value (unlike shares). Interest is
always paid based on the nominal value. Interest accrued $8,000 (12% × $400,000 × 2/12).”My question is:
1) Is Argonaut Co the borrower?
2) “Loan notes can be issued at a discount to their nominal value ” Does this mean even Argonaut borrows 400k usd, they only need to pay back 380k usd in future? If this is correct, then why Dr Cash is 380k usd and not 400k usd?1. Yes – Argonaut is the borrower.
2. It is the other way round. They raise $380,000 but then have to repay $400,000.
Sir, do they have to repay 400k? Shouldn’t the non current liability then be 400k?
How does the entry balances?
Dr Cash 380k
Cr. Loan 400kWhen they issue the loan notes they will Dr Cash and Cr Loan notes with $380,000.
When they come to repay, they will Cr Cash with $400,000, Dr loan notes with $380,000, and Dr Retained Earnings with $20,000. However this last entry itself is not examinable in Paper FA.
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