Chp 13: Borrowings

Question 1

Explain the differences between bank loan and a bank overdraft. (must know)

Answer 1

For Bank Loan: Business borrows a fixed and the Cash is transferred to the business

For Bank overdraft: Business withdraws more than what it has deposited in the bank account, up to the lime agreed by bank and business.

For Bank Loan: Business makes regular cash payments in equal instalments over the loan period.

For Bank overdraft: Business deposits cash into the bank account within the year to reduce the overdraft

Question 2

Journal entry when business takes up a bank loan

Answer 2

Question 3

Journal entry when business REPAYS a bank loan

Answer 3

Question 4

Journal entry when business PAID interest

Answer 4

Question 5

Journal entry when business INCURRED interest BUT NOT PAID

Answer 5

Question 6

State and explain the accounting theory behind the accounting of interest

Answer 6

According to matching theory, the interest expense incurred

must be matched against the income earned

in the same accounting period

to determine profit for the period.

Question 7

Explain the accrual basis of accounting behind the accounting of interest

Answer 7

According to accrual basis of accounting,

interest expense must be recognised in the financial period once INCURRED,

regardless of whether it has been paid.

Question 8

Important Q: How much is the NCL and CL as at 31 Dec 2020. Clarify if have difficulty understanding.

Answer 8

Question 9

Describe the transaction on March 31

Answer 9

On 30 June, the business repaid the loan of $ 7 500 to Sharpe by cheque

Question 10

Describe the transaction on 1 Jan 2021

Answer 10

Business has outstanding loan of $60 000 owing to Sharpe as at 2021 Jan 1, brought forward from previous year.

Question 11

Describe the transaction on Jan 1

(HINT: Reversal)

Answer 11

The entry is to REVERSE the interest expense payable of $2000 as at 31 Dec 2021 and to be paid this year. (does it look familiar?)

Question 12

Describe the transaction on June 30.

Answer 12

On 30 Jun 2022, business paid interest of $5000 by cheque.

Question 13

Describe the transaction on Dec 31

Answer 13

On 31 Dec 2022, business incurred and owed interest of $2 250 for the year ended 31 December 2022.

Question 14

Describe the transaction for $4 750

Answer 14

On 31 December 2022, total interest incurred was $4 750 and this was transferred to income summary

Question 15

Biz took up a 5% bank loan of $500 000 on 1 Sept 2021, to be repaid over 10 years.

Accounting year ends on 31 December, Interest and principal amount.

How much interest is incurred as at 31 December 2021? Journal entries?

Answer 15

Interest = 5% x 500 000 x 6/12

= 12 500