KungFuKipper
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Amortisation of loan

Amortisation of loan

Morning,

A director of a small limited company wants to lend his company the money to meet a regular bil (committed to for at least 10 years)l. The company will be paying this bill monthly for the next few years and the director wants to pay the money into the company as though the entire amount is transferred to the company today. He will however be foregoing salary for the next few years until the loan is completed. Accrual or amortisation or just plain wrong?

KFK

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25th Feb 2016 11:17

Do you mean that the director will loan the company monthly, but he wants it to be shown as if it was paid in one go at the beginning?

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25th Feb 2016 11:35

Put it all in now

Credit the director's loan account with the money he intends to pay in full. Then debit the director's loan with the amount he has committed to pay in the future but has not yet done so. Job done.

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25th Feb 2016 12:12

?

It's not clear if the payments to the 3rd party are in settlement of a liability that exists now (e.g repaying a loan), or settling a recurring bill (e.g rent repayments on a 10 year lease)

If the latter then isn't it:

The director pays a big lump sum into the company: Cr DLA Dr bank

The company pays the recurring payment to the 3rd party Cr Bank Dr P&L

The director draws loan repayment from profit instead of salary Cr Bank Dr DLA

 

 

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25th Feb 2016 12:56

It's repaying a loan - a fixed liability
But I think (he thinks) he can have the loan to the company appear on the accounts without paying the money in in one go.

Pay £10k to the company from his own self employed business (without actually paying the cash up front) maybe some kind of accrual against his other company.

It's more academic interest than advising the client at this stage though....

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25th Feb 2016 13:11

That's a no from me then

Is this because he wants to show a big expense in hes s/e business perhaps (an accrual of what though)? Or offset the liability in the ltd co to improve the b/s (but for every debit there is a credit, so this won't work?

I think you know he is barking up a wrong tree here. 

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25th Feb 2016 13:27

I thought so too
Until I started to think about it....if you can add an accrual for a long term liability and then pay that liability down. Can you not similarly do the same for a loan to the company even when the cash for that loan is released over the same period. There is a debit and a credit....both cancelling each other out over time (reverse the d&c) - the liability is reduced by payment of the loan (debit and credit) the directors loan is r paid by foregone income (salary).

It is one of those 'round in circles' arguments though.

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25th Feb 2016 13:37

but...

So you want to create a liability for the individual to pay the company a regular sum of money over a period, so there is a liability in the individual's books, and an asset in the company (the benefit of future cash flows). What is the double entry for that asset in the company's books? 

The alternative is that you recognise the debt to the individual whenever he makes a payment on the co's behalf, and settle by repaying him when the co can afford it

In short I don't think you can create a larger DLA than the amount that the D has actually L'd

 

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25th Feb 2016 14:05

Like I said

WhichTyler wrote:

So you want to create a liability for the individual to pay the company a regular sum of money over a period, so there is a liability in the individual's books, and an asset in the company (the benefit of future cash flows). What is the double entry for that asset in the company's books? 

The alternative is that you recognise the debt to the individual whenever he makes a payment on the co's behalf, and settle by repaying him when the co can afford it

In short I don't think you can create a larger DLA than the amount that the D has actually L'd

 

 

The double entry for this adjustment has both entries in the DLA therefore it's no entry at all.

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By DJKL
25th Feb 2016 14:18

Every debit has a credit

Duggimon wrote:

WhichTyler wrote:

So you want to create a liability for the individual to pay the company a regular sum of money over a period, so there is a liability in the individual's books, and an asset in the company (the benefit of future cash flows). What is the double entry for that asset in the company's books? 

The alternative is that you recognise the debt to the individual whenever he makes a payment on the co's behalf, and settle by repaying him when the co can afford it

In short I don't think you can create a larger DLA than the amount that the D has actually L'd

 

 

The double entry for this adjustment has both entries in the DLA therefore it's no entry at all.

Or, if not both posted to DLA then as a variant and  throwing all logic aside, the borrowing entity posts:

Dr Cash actually received

Dr Debtor for cash still  to be received

Cr Loan for full amount.

Strikes me as a nonsense akin to recognising a bank overdraft in one's books with reference to the facility limit rather than the amount drawn!

The only time I can recall seeing anything similar was when HP agreements were sometimes posted:

Dr Asset

Dr Debtor re  future HP charges

Cr Total HP liability (inc charges)

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