Loan and Interest Hidden Adjustment in Final Accounts

 

Adjustments given below trial balance must be adjusted for final account.

Adjustment entry means not adjusted while preparing trial balance.

It is also known additional information.

Almost all the adjustment entry effects dual aspect.

One is debit and other is credit. 

There are a number of adjustments to be made while finalizing the financial statements.

But our discussion will be limited to the following adjustments (limited by the curriculum):  

 

Major Adjustments in Final Accounts

Closing stock Outstanding expenses Prepaid expenses Accrued income or income receivable   Advance income or unearned income Depreciation on assets Appreciation on assets Written off or amortized Purchase or sale of fixed assets Bad debts, provision and discount Bad debts recovered

Goods loss by fire and insurance claim Goods distribute as free sample Manager’s commission Bonus to employees and retirement benefit Create reserve (general reserve and capital reserve) Goods sold on sale or return basis Hidden adjustment: (a) Interest on loan or debenture (b) Interest on investment (c) Monthly rent and salary

 

Hidden Adjustments in Final Accounts

Some information is not clarified in additional adjustment.

These transactions should be adjusted on the basis of indication or hints.

Such adjustment is known as hidden adjustment.

The examples of such hidden information are:

10% Debentures or loan

5% Investment

Rent @ Rs 5,000 per month

7% Preference shares capital

According to above examples

10% interest should be payable on debenture or loan,

5% interest should be receivable on investment,

Total rent for the year would be Rs 60,000 viz (12 months x Rs 5,000),

7% preference dividend should be payable if dividend paid on equity shares capital.

Keep in Mind (KIM)

When account balance is given in percentage (%) in trial balance like 8% debentures, 7% investment, 5% government bond etc there may be hidden adjustment.

 

There are four options for interest:

(a) Interest is not paid

(a) Partial interest paid (50%, 3 months, 6 months, 9 months etc)

(b) Full (100%) interest paid

ADJUSTMENT: 18A

The following extracted information of NG Company Ltd is given below:

                                             Extracted Trial Balance

                                             As on 31^st December 2019

Particulars	Debit	Credit
10% loan	−	500,000 −

Required: Effect in final account

SOLUTION:

Given and working note:

Interest on loan for one year = 500,000 @ 10% = 50,000

There is not interest paid

Now, interest payable = 50,000

 

Journal Entries

Date	Particulars		LF	Amount	Amount
	Interest on loan account           To Outstanding interest account  [Being- interest paid and payable, 500,000@10%]	Dr		50,000	50,000

 

Profit and Loss Account

Particulars		Amount	Particulars	Amount
To Interest on debenture        Add: Outstanding	Nil +50,000	50,000

 

Balance Sheet

Liabilities	Amount	Assets		Amount
Secured & Unsecured loan: 10% Loan   Current liabilities: Outstanding interest on debenture	500,000     50,000

 

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Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = 

ADJUSTMENT: 18B

The following extracted information of NG Company Ltd is given below:

                                             Extracted Trial Balance

                                             As on 31^st December 2019

Particulars	Debit	Credit
10% Loan Interest paid	− 20,000	500,000 −

Required: Effect in final account

SOLUTION:

Given and working note:

Interest on debentures for one year = 500,000 @ 10% = Rs 50,000

Interest Rs 20,000 has already paid.

Now, interest payable = 50,000 –20,000 = 30,000

 

Journal Entries

Date	Particulars		LF	Amount	Amount
	Interest on debenture account           To Bank account           To Outstanding interest account  [Being- interest paid and payable, 500,000@10%]	Dr		50,000	20,000 30,000

 

Profit and Loss Account

Particulars		Amount	Particulars	Amount
To Interest on debenture        Add: Outstanding	20,000 +30,000	50,000

 

Balance Sheet

Liabilities	Amount	Assets		Amount
Secured & Unsecured loan: 10% Loan   Current liabilities: Outstanding interest on debenture	500,000     30,000

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = 

ADJUSTMENT: 18C

The following extracted information of NG Company Ltd is given below:

                                             Extracted Trial Balance

                                             As on 31^st December 2019

Particulars	Debit	Credit
10% Debenture Interest paid	− 25,000	500,000 −

Additional information:

Interest is to be paid for 6 months

Required: Effect in final account

SOLUTION:

Given and working note:

Interest on loan for one year = 500,000 @ 10% = 50,000

Interest Rs 25,000 has already paid.

Now, interest payable = 50,000 – Rs 25,000 = 25,000

Here, 6 months means 50% interest paid, and 50% is to be paid.

 

Journal Entries

Date	Particulars		LF	Amount	Amount
	Interest on debenture account           To Bank account           To Outstanding interest account  [Being- interest paid and payable, 500,000@10%]	Dr		50,000	25,000 25,000

 

Profit and Loss Account

Particulars		Amount	Particulars	Amount
To Interest on debenture        Add: Outstanding	25,000 +25,000	50,000

 

Balance Sheet

Liabilities	Amount	Assets		Amount
Secured & Unsecured loan: 10% Debentures   Current liabilities: Outstanding interest on debenture	500,000     25,000

 

Here, Amount = Rs = $ = £ = € = ₹ = Af = ৳ = Nu = Rf = රු = 

ADJUSTMENT: 18D

The following extracted information of NG Company Ltd is given below:

                                             Extracted Trial Balance

                                             As on 31^st December 2019

Particulars	Debit	Credit
10% Debentures Interest paid	− 50,000	500,000 −

Required: Effect in final account

SOLUTION:

Given and working note:

Interest on debenture for one year = 500,000 @ 10% = 50,000

Interest Rs 50,000 has already paid.

Now, interest payable = 50,000 – 50,000 = Nil

 

Journal Entries

Date	Particulars		LF	Amount	Amount
	Interest on debenture account           To Bank account           To Outstanding interest account  [Being- interest paid and payable, 500,000@10%]	Dr		50,000	50,000 Nil

 

Profit and Loss Account

Particulars		Amount	Particulars	Amount
To Interest on debenture        Add: Outstanding	50,000 + NIL	50,000

 

Balance Sheet

Liabilities	Amount	Assets		Amount
Secured & Unsecured loan: 10% Debentures   Current liabilities: Outstanding interest on debenture	500,000     NIL

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