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Intercompany Loan Write Off

Loan written off in prior year to receipt of the loan

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Hi

I have a client who owns Company A (EU Company) and Company B (UK Company). Company A loaned B an amount (c.£100,000) between February 2018 and June 2018 to purchase stock but it was never going to be repaid. The company who loaned the money was then closed shortly thereafter before the 31st Jan 2018 accounts of Company B were completed; therefore the previous accountant wrote off the loan balance in Company B to increase ''profit'' in the Jan 18 accounts before the loan was even received. At this point the client started to use Xero and so I only have the conversion balances in Xero at 31st January 18 and no working papers from the previous accountant on how they treated/recorded the loan write off. 

At present the loan write off in 31st Jan 2018 has increased profit by c.£100k, but with the payments being received in Feb it creates a new liability and so if written off will create another c£100k of profit. I have no idea what the double entry was of the original write off; Cr P&L but Dr ?? No payments were received by this point and so no liability from what I can tell

Feb 18 Payments received are Dr Bank and Cr Liability; write off would be Dr Liability Cr P&L

Any advice on what I am missing to sort this ? I have been looking at it but without knowledge on the original workings I cannot sort the double entry without duplicating the ''profit''. Is there something I am missing or perhaps something the client isn't making me aware of?

Thanks, Chris

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By Tax Dragon
22nd Apr 2021 07:10

"Dr ??"

So ?? is 100k over? Until that is you either pop in Cr ?? (maybe instead of Cr P&L) or correct the previous accounts if that's necessary.

Caveat: I'm not an accountant and it's not that long since I've said I'd leave the accounting questions to the accountants. But I think the issue here may be less how to do the accounts, more why you haven't either spotted what's 100k over (in what I'm guessing is a youngish company) or asked the previous accountant what ?? is.

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Replying to Tax Dragon:
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By ChrisRollo91
22nd Apr 2021 09:55

Thanks for the reply.

I only have the conversion balances with no prior information on the original transactions themselves that the previous accountant did. I don't even have any information on who the accountant even was at the time as the client won't provide as it ended on bad terms and seems resistant to me contacting them which raises red flags

Client confirms all other balances on the Balance Sheet are correct at the time (as there are other loans from connected companies showing) but the opposite of the Loan Write Off transaction must have been put somewhere so I can only think its within one of these other loan accounts and labelled incorrectly

I need to push harder for the previous accountants info and contact them

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Psycho
By Wilson Philips
22nd Apr 2021 08:10

As TD suggests, you need to find out what the other side (Dr) of the write-off was.

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Replying to Wilson Philips:
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By ChrisRollo91
22nd Apr 2021 09:57

Thanks for the reply

Client wont provide prior accountants details as the relationship ended badly

I will push harder and advise I need them to resolve as without the original entries I cannot resolve

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Replying to ChrisRollo91:
Psycho
By Wilson Philips
22nd Apr 2021 12:13

If you don't have the previous accountant's details how did you manage to get professional clearance? If you were unable to contact the accountants because the client refused to give you their details you ought to have walked away.

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By paulwakefield1
22nd Apr 2021 08:14

A few questions:

Was it in fact a loan? You say it was never going to be repaid. Was it a transfer of funds out of a company about to be shut? Could it have been a dividend? (Was it above board?)

How do you know how the previous accountant treated it as it sounds as if you do not have much information from them? It certainly does not make much sense to write off a loan before received! Did the previous accountant think it was some form of income and treated it as an accrued income amount? I realise that does not accord with your belief it was written off but perhaps, rather than a loan account, it is sitting in prepayments and accrued income?

Can you contact the previous accountant?

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Replying to paulwakefield1:
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By ChrisRollo91
22nd Apr 2021 10:05

Thanks for the reply

I don't have any information from the previous accountant at all; only the conversion balances on Xero. The client won't authorise me to contact them as the relationship ended badly (I don't even know who they are!). The conversion balances show the 'Loan Write Off' amount in the P&L but as I don't have the info on where the other side of the transaction was put I cannot resolve. As money wasn't received until the following financial year there wouldn't have been a liability showing to even write off so something does seem off.

The only other balances on the BS are other loans from other connected companies which client confirms are all correct and nothing to do with this particular write off in question.

Only way to resolve is to get the accountants details and get the original workings. I believe it must be within one of these other loan accounts sitting on the BS and the client is either unaware of what the accountant did or not giving me the full info.

Thanks

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Replying to ChrisRollo91:
Melchett
By thestudyman
23rd Apr 2021 23:05

I would potentially be having second thoughts about this appointment if you are being refused permission to contact the old accountants. This sounds like a PITA client.

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By Tax Dragon
22nd Apr 2021 10:15

Maybe it ended badly when the accountant pointed out the tax consequences. Or worse. (And maybe the relationship ended with the resignation of the accountant?)

A sour relationship is no excuse not to provide you with information. That does suggest the client may be hiding something.

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