Early repayment of an interest free loan FRS 102

How to book keep the early repayment of an interest free loan due in 5 years

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Parent lent £5m to a subsidiary, interest free and repayable in 3 years. Calculated present value and book kept the difference between the face value of the loan and the amount initially recognised as an investment in subsidiary. 

The loan has been repaid early when the present value of loan receivable was £4,712,979. How do I book keep this?

DR Cash £5,000,000

CR Loan receivable £4,712,979

CR where does the balance go?

 

 

Replies (12)

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stonks
By WinterDragon
18th Apr 2024 15:39

Presumably wherever the balance went when the parent first lent to the subsid.

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Replying to WinterDragon:
By Ruddles
18th Apr 2024 15:48

+1

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By paul.benny
18th Apr 2024 16:20

The problem you have is that the initial entries were wrong - surprised that got through audit, but I suppose it all eliminates on consolidation.

The borrower should initially have recognised a loan payable of £4.7m and then booked P&L interest expense each period with the credit being capitalised against the loan balance. And vice versa on the lender side.

Compounding means that the interest is not flat each year. I make it roughly £90k/£92k/£94k in years 1/2/3 if the entire balance was repayable at term. FWIW, the implied interest rate looks very low.

All that said, your dangling credit goes to offset the original erroneous debit.

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Replying to paul.benny:
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By rmillaree
18th Apr 2024 16:40

"All that said, your dangling credit goes to offset the original erroneous debit."

what a lovely turn of phrase

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Replying to paul.benny:
John Toon
By John Toon
18th Apr 2024 16:44

I actually think, if the parent company recognised this as an investment (which is what the OP states) that we've got a capital contribution, recognisable in equity, in the sub. Accounting probably should have been done at NPV and unwound as you said though and it sound like it was all done wrong...

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Replying to paul.benny:
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By Bobbo
18th Apr 2024 17:54

paul.benny wrote:

The problem you have is that the initial entries were wrong - surprised that got through audit, but I suppose it all eliminates on consolidation.

The borrower should initially have recognised a loan payable of £4.7m and then booked P&L interest expense each period with the credit being capitalised against the loan balance. And vice versa on the lender side.

Compounding means that the interest is not flat each year. I make it roughly £90k/£92k/£94k in years 1/2/3 if the entire balance was repayable at term. FWIW, the implied interest rate looks very low.

All that said, your dangling credit goes to offset the original erroneous debit.

Are you possibly reading things in the question that are not there?

OP doesn't say the loan was initially recognised at 4.7m. They say it was repaid early, at which point the book value was 4.7m. Which implies the initial discounted amount had been partially unwound, but not fully due to early repayment.

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Replying to Bobbo:
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By BFR
19th Apr 2024 08:12

Here are the journal entries we have so far in the parent accounts:

On recognition of the loan
DR Loan receivable £4,442,435
DR Investment in sub £557,565
CR Cash at bank £5,000,000

Then for the application of the amortised cost method for year 1
DR Loan receivable £133,273
CR P&L interest income £133,273

Then for the application of the amortised cost method for year 2
DR Loan receivable £137,231
CR P&L interest income £137,231

At this point, repayment in full is made so:
DR Cash at Bank £5,000,000
CR Loan receivable £4,712,979
CR ?

Does the missing CR figure go against the initial investment in subsidiary ledger to reduce the £557,565 figure or is it considered interest income going through the P&L?

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Replying to BFR:
By Ruddles
23rd Apr 2024 14:33

Last time I looked at this, I believe that the correct treatment is to credit the investment in sub. This will leave a balance on that account reflecting the value given to the sub in the form of the interest-free loan over the shortened term. (Had the loan run its term, the balance sheet would have been left with the full amount of notional interest as its investment in sub).

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By Arcadia
23rd Apr 2024 14:09

This question seems rather odd. It is the identical set of figures used in the ICAEW guidance note. Is someone trying to test us?

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Replying to Arcadia:
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By BFR
23rd Apr 2024 14:14

I've used the figures from the ICEAW example as that is the guidance I used when book keeping. However the ICEAW example doesn't explain what happens when the loan is repaid early.

I am struggling to find any guidance on the early loan repayment and hoped someone here might have dealt with this.

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Replying to Arcadia:
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By rmillaree
23rd Apr 2024 14:21

if someone wants something checked its not incommon for people to use examples from an online source rather than the figures they may be using so perhaps they replaced actual figures with those out of the guidance - that makes sense to assist anyone commenting who would link back to that same guidance

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By paulwakefield1
23rd Apr 2024 18:33

Does the FRC Staff Education Note 16 help at all? Examples 2 and 6 do not specifically deal with early repayment but may help you towards a solution.

I find this whole treatment a triumph of very good theory over real life. There are some scenarios, one of which I came across last year, where there is no way it can be followed. As agreed by ICAEW and a well known lecturer!

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