Specific bookkeeping (Accounting) related question for the following scenario!

Hello Everyone!

I have a specific question and really hope someone could enlighten me. It is a transaction that does not happen everyday and therefore might be a good brain destroying exercise for Tutors and other fellow ACCA students alike. We certainly could all only benefit from the knowledge of the accounting treatment.

Let’s assume it’s 31/12/2020 (Year End close) and Entity A (part of another company (Company B) has changed it’s legal structure and is from 01.01.2020 a completely independent company from company B.
Both companies A and B are still part of the same organisation (part of the wider group of Companies) and will settle sales and purchases via intercompany transfers with each other.

Now, Company B provides Company A with a Loan. The money for the loan has actually never been received but instead it will be posted the following way….

DR Retained Earnings CR Reserve account (Both are Equity accounts)

The loan posting has been created during year- end close to be taken over into the new company, I should probably mention.

A month later company B asks for the payment of the loan. Now my question is what would the settlement look like?

Would it be DR Reserve Account and CR intercompany Bank account ??

I personally struggle with this one as I feel something is missing here. How is it possible that we create value out of nowhere and then use it in an actual intercompany money transfer?

I know that this is a specific case but I honestly believe it could help other people as well going forward. Therefore could you please help me to find the right answer to this situation.

Is it okay to create a Loan against Equity accounts without ever actually receiving the loan?

Many thanks in advance.

Kind regards

Cityfox