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Loan transactions

EXAMPLE 1
A company borrows 100 @ 10% per annum on 1/4/2009. The loan is repayable
in 10 equal quarterly installments together with interest due. The first installment is due
on 30th June 2009.

Accounting entry on 1/4/2009:


A+E=L+OE+R Bank (current a/c) - asset 100
Loan - Liability 100

1. What is the total amount due/payable on 30th June 2009? How much is the
interest and principal?
2. What is the total interest expense for the period 1-4-2009 to 31-3-2010?
3. What is the outstanding loan amount as on 31-3-2010?

In order to answer the above questions, a loan repayment schedule is to be


prepared as shown below. As part of principal is being paid every quarter,
the amount of interest goes on reducing - "Reducing Balance Method".

Year Quarter Quarter Opening Interest Loan Total Closing


End Date Balance of for the Repayment Payment Balance of
Loan Quarter Loan

2009-10 1 30/06/09 100 2.50 10 12.50 90


2 30/09/09 90 2.25 10 12.25 80
3 31/12/09 80 2.00 10 12.00 70
4 31/03/10 70 1.75 10 11.75 60
Year Total 8.50 40.00

Answer 1: The total amount due/payable as on 30th June 2009 is 12.50, of which 2.50 is
interest and 10 is principal.

Accounting entry on 30/6/09:


A+E=L+OE+R Interest -Expense 2.5
Bank - asset -12.5
Loan - liability -10

Answer 2: The total interest expense for 2009-10 is 8.50


Answer 3: The outstanding loan amount as on 31/3/10 is 60.
EXAMPLE 2
A company borrows 100 @ 10% per annum on 1/1/2009. Its financial year is April to March.
The loan is repayable in 10 equal half-yearly installment together with interest. The first
installment is due on 30th June 2009.

1. Is there any interest entry for 2008-09 that would end on 31/3/09?
2. What is the amount payable on 30th June 2009?
3. What is the total interest for 2009-10?
4. What is interest payable and closing balance of loan on 31/3/2010?

Answer 1: The interest for the period 1-1-2009 to 31-3-2009 is accrued (under accrual concept)
on 31/3/09 but not due for payment till 30/6/2009 (in the next financial year).
The company needs to book interest expense for
this period and create a liability called "INTEREST ACCRUED BUT NOT DUE" which would
appear in the balance sheet as at 31/3/09.

Please note that in previous example interest was accrued and due for payment at the respective
quarter end dates.

Accounting entry on 31/3/09:


A+E=L+OE+R Interest -Expense 2.5 (100*0.1/4)
Interest accrued but not due (Liabi) 2.5

Answer 2: The amount payable on 30/6/09 includes interest for the period 1/1/09 to
31/3/09 of 2.50 (for which liability is already created) plus interest for the period 1/4/09 to 30/6/09 of 2.50
plus principal of 10. The total amount would be 15.

Accounting entry on 30/6/09:


A+E=L+OE+R Interest -Expense 2.5 for the period 1-4-09 to 30-6-09
Bank - asset -15
Interest accrued but not due (Liabi) -2.5 Liability is paid off
Loan - liability -10

Answer 3: The interest for 1/4/09 to 30/6/09 is 2.50. On this date, principal of 10 is paid and hence,
loan outstanding on 30/6/09 is 90. The interest for the period 1-7-09 to 31-12-09 would be on 90 @ 10% and
this would be (90*0.1)/2 i.e. 4.50. Another 10 would be paid on 31/12/09 and the loan balance would be 80.
The interest for the period 1-1-10 to 31-3-10 would be on 80 @ 10% and this would be (80*0.1)/4 i.e. 2.00
Thus, the total interest for 2009-10 would be 2.50+4.50+2.00 = 9.00.

Answer 4: The interest for the period 1-1-10 to 31-3-10 is again accrued but not due for payment.
Hence, interest payable as on 31/3/10 would be 2.00. The closing balance of loan as on 31/3/10 is 80.

Accounting entry on 31/12/09:


A+E=L+OE+R Interest -Expense 4.5
Bank - asset -14.5
Loan - liability -10

Accounting entry on 31/3/10:


A+E=L+OE+R Interest -Expense 2
Interest accrued but not due (Liabi) 2