CFM22050 - Accounting for corporate finance: Old UK GAAP excluding FRS 26 lenders: accrual accounting: discounted loans
The following guidance covers Old UK GAAP (applied before 2015) where FRS 26 was not applied.
Balance Sheet: timing
Sometimes a company may issue a loan which is to be redeemed (repaid) at a greater amount. Where this happens, the company will record the loan at its issue cost and then spread the difference (known as the discount) over the period to redemption. This means that the value of the asset on the balance sheet (the carrying value) increases each period. This is not a revaluation to go through a revaluation reserve, but a realised profit within the profit and loss account and will be shown as finance income.
Example
On 1 January 2008, Company A issued a loan to Company C. The terms of the loan are that Company A would advance £9,500 immediately and Company C would repay £10,000 on 31 January 2008.
The bookkeeping would be:
| - | Debit | Credit |
|---|---|---|
| On 1 January 2008 | - | - |
| Loan with Company C | £9,500 | - |
| Cash at Bank | - | £9,500 |
| On 31 January 2008 | - | - |
| Cash at Bank | £10,000 | - |
| Loan with Company C | - | £9,500 |
| Finance Income (in P&L) | - | £500 |