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Loan by way of promisory note

Treatment of 'interest'

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A client company has made a loan to an unconnected person which is evidenced by a promisory note and secured by a charge on the borrower's house.  The loan is £40,000 and the principal amount stated in the promisory note is £50,500.  The repayments are 49 x £1,000 and a final payment of £1,500 which includes £500 legal fees.

The paragraph in the promisory note dealing with early settlement makes it clear that the 'interest' element of the repayments (£200 per month) accrue evenly over the term.  The only mention in the note of interest is in the clause dealing with default where interest on the principal (£50.5k) is charged at Barclays base rate + 8%.

I assume that the £200 per month is just treated in the company's accounts and CT600 as interest received, but having never seen a similar arrangement before I'm looking for some reassurance.

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By johngroganjga
22nd Jul 2019 13:04

Strictly speaking I think the company should be accounting for the interest on the sum of the digits method or something similar, but the difference between that and straight line may not be material.

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Replying to johngroganjga:
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By nutwood
23rd Jul 2019 07:54

Thanks, John.
On reflection I think I will have to go with straight line as this will give the a balance sheet figure which reflects the terms of the agreement in the event of early settlement or default.

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