Hi
Today my teacher has released my POA assignments for the week. When I started one of them, I realised that there is one adjustment in Financial Statement question that I don't quite understand.
This adjustment is as follows:
"The bank loan was obtained on 1 January 2015. The repayment of the principal sum and interest will begin the next year and on 31 December every year. The loan is to be repaid within 5 years. No adjustment has been made in the books"
To provide an overview, the balances of the books of the Sole Proprietorship were extracted from 30 June 2015. What I was given was that:
Cash at Bank = 33 000
5% Bank Loan = 100 000
I had requested for my teacher to explain it but she said that she don't know and need reference from the answer key. I asked a few of my friends but none knew how to do. And this was the first time I encountered this...
Any kind soul willing to explain it to me? Thanks in advance.
This is like 3 months late, really sorry about that. Just going to tackle for May curious souls out there.
"5% Bank loan" is the total bank you you have in your bank, not 5% of it. The percentage is for your interest expense. Meaning that you are suppose to pay (100000x5%)$ for your interest expense.
going back on topic. You have to pay your loan of 100000$ over 5 years, so each year, you are suppose to pay 20000$ each year. It is said that you have not record yourself paying 20000$ this end of year.
cash at bank can be left out of this, the other double entry is "Current portion of long-term borrowing"
what you are doing is basically taking a portion of long term borrowings and putting it in current liabilities, because you have to pay it that year.
so in your balance sheet, Long term borrowings would be (100 000-20 000)$ in your non current liabilities. In current liabilities, you will have an entry that is "Current portion of long-term borrowing" of 20 000$.
and you are done!