Home For AAT student members AQ 2013 AAT Level 4 (Level 8 in Scotland)

DFS- Muggeridge

EsmeEsme Experienced MentorRegistered Posts: 711
I'm trying to complete this assignment.

If debenture interest hasn't been paid during the year, how is this shown on the Income statement or balance sheet?

Thx

Comments

  • Steve CollingsSteve Collings Experienced Mentor Registered Posts: 997
    Hi,

    You need to fall back to the provisions in the Framework Doc - if a liability exists at the reporting date then it needs to be reflected in the financial statements.

    You would raise a liability by providing for a creditor, therefore accruing for the interest, with the corresponding debit going to the income statement.

    [I have pointed you in the right direction but without giving you the answer (as it is an assignment) what would the double entry be?

    Kind regards
    Steve
  • EsmeEsme Experienced Mentor Registered Posts: 711
    I haven't got my books on me today, but would it be one side to creditors and the opposite entry as an accrual?
  • Steve CollingsSteve Collings Experienced Mentor Registered Posts: 997
    Hi Esme,

    What we are doing is accruing for loan interest. Loan interest is paid to the finance company (usually half-yearly). A common scenario is where there is already loan interest in the trial balance (as an expense - a debit) and we need to accrue for another 6 months worth of interest. This means that BEFORE we accrue for the interest, the finance costs in the income statement are understated because they only contain the firs half yearly interest. We therefore need to make the finance cost in the income statement contain a full year's interest, so we would uplift finance costs in the income statement by way of a DEBIT. The corresponding CREDIT would be made to accruals which is a liability in the statement of financial position which represents the monies owed to the finance company which is paid after the reporting date.

    I hope that helps.

    Kind regards
    Steve
  • EsmeEsme Experienced Mentor Registered Posts: 711
    Thank you Steve
Sign In or Register to comment.