Accounting for loan payables, such as bank loans, involves taking account of receipt of loan, re-payment of loan principal and interest expense.
Receipt of Loan
Liability for loan is recognized once the amount is received from the lender.
Accounting entries for the receipt of loan are as follows:
|
Debit |
Cash at Bank |
|
|
Credit |
Loan Payable |
|
Loan payables need to be classified under current or non-current liabilities depending on the maturity of loan re-payment. For example, if a loan is to be repaid in 3 years’ time, the liability would be recognized under non-current liabilities. After 2 years, the liability will be re-classified under current liabilities, i.e. when the loan is due to be settled within one year.
Where loan is to be repaid in several installments, the current and non-current portions of the loan would need to be calculated using the loan repayment schedule (see example).
Interest Expense
Interest expense is calculated on the outstanding amount of loan during that period, i.e. the unpaid principal amount outstanding during the period. The outstanding amount of loan could change due to receipt of another loan installment or repayment of loan. Interest calculation needs to account for the changes in outstanding amount of loan during a period (see example).
Accounting entry for recording interest accrued is as follows:
|
Debit |
Finance Cost |
|
|
Credit |
Interest Payable |
|
Upon payment of interest, following accounting entry will be recorded:
|
Debit |
Interest Payable |
|
|
Credit |
Cash at Bank |
|
Interest may be fixed for the entire period of loan or it may be variable. Floating interest, also known as variable interest, varies over the duration of the loan usually on the basis of an inter-bank borrowing rate such as LIBOR. Fixed interest rate does not vary over time but is more expensive than a floating interest rate.
Repayment of Loan
Repayments reduce the amount of loan payables recognized in financial statements.
Following accounting entry is used to account for the repayment of loan:
|
Debit |
Loan Payable |
|
|
Credit |
Cash at Bank |
|
Example
ABC PLC received a bank loan of $100,000 on 1 January 20X1.
Terms of the loan agreement are as follows:
- Loan is re-payable in 2 installments of $50,000 each on 30 June 20X2 and 30 June 20X3.
- Interest is payable six-monthly in arrears at 5% plus LIBOR.
- For the purpose of calculating interest, 6-month LIBOR at the start of each 6 month period will be used.
6-month LIBOR rates over the period of the loan were as follows:
| Date | LIBOR Rate |
|---|---|
|
1 January 20X1 |
7% |
|
1 July 20X1 |
8% |
|
1 January 20X2 |
9% |
|
1 July 20X2 |
8% |
|
1 January 20X3 |
10% |
Assuming all liabilities were settled on the due date, calculate:
- Interest expense to be recognized in the income statements for the years ended 30 June 20X1, 30 June 20X2 and 30 June 20X3.
- Loan payables to be recognized in the balance sheets as at 30 June 20X1, 30 June 20X2 and 30 June 20X3.
Solution
| Income Statement for the year ended (Extracts) | |||
|---|---|---|---|
|
|
30 June 20X1 |
30 June 20X2 |
30 June 20X3 |
|
Finance Cost (Working 2) |
6,000 |
13,500 |
7,000 |
| Statement of Financial Position as at (Extracts) | |||
|---|---|---|---|
|
|
30 June 20X1 |
30 June 20X2 |
30 June 20X3 |
|
Non-Current Liabilities |
|
|
|
|
Bank Loan (Working 3) |
50,000 |
- |
- |
|
Current Liabilities |
|
|
|
|
Bank Loan (Working 3) |
50,000 |
50,000 |
- |
Working 1: Interest Rate
| Period | LIBOR | Spread | Interest Rate |
|---|---|---|---|
|
|
A |
B |
A+B |
|
1 January 20X1 - 30 June 20X1 |
7% |
5% |
12% |
|
1 July 20X1 - 31 December 20X1 |
8% |
5% |
13% |
|
1 January 20X2 - 30 June 20X2 |
9% |
5% |
14% |
|
1 July 20X2 - 31 December 20X2 |
8% |
5% |
13% |
|
1 January 20X3 - 30 June 20X3 |
10% |
5% |
15% |
Working 2: Finance Cost
| Period | Loan Outstanding | Interest Rate | Finance Cost |
|---|---|---|---|
|
|
A |
B |
(A x B) / 2 * |
|
1 January 20X1 - 30 June 20X1 |
100,000 |
12% |
6,000 |
|
1 July 20X1 - 31 December 20X1 |
100,000 |
13% |
6,500 |
|
1 January 20X2 - 30 June 20X2 |
100,000 |
14% |
7,000 |
|
|
|
|
13,500 |
|
1 July 20X2 - 31 December 20X2 |
50,000 |
13% |
3,250 |
|
1 January 20X3 - 30 June 20X3 |
50,000 |
15% |
3,750 |
|
|
|
|
7,000 |
*Yearly interest payment has been divided by 2 to obtain the amount of half yearly interest payment.
Working 3: Loan Payable
| Period | Loan Outstanding | Current | Non-Current |
|---|---|---|---|
|
|
A |
B |
A - B |
|
1 January 20X1 |
100,000 |
- |
100,000 |
|
30 June 20X1 |
100,000 |
50,000 |
50,000 |
|
30 June 20X2 |
50,000 |
50,000 |
- |
|
30 June 20X3 |
- |
- |
- |