D Limited has a policy of providing subsidized loans to its employees for their personal purposes. Mr. Y, an employee of the Company, took a loan of…

CA Final · Financial Reporting · MTP · May 2024
D Limited has a policy of providing subsidized loans to its employees for their personal purposes. Mr. Y, an employee of the Company, took a loan of 12.00 lakhs on the following terms: Interest rate 4% per annumLoan disbursement date: 1 st April, 20X1The principal amount of the loan shall be recovered in 4 equal annual installments commencing from 31 st March, 20X2The accumulated interest computed on reducing balance at simple interest is collected in 3 equal annual installments after collection of the principal amountMr. Y must remain in service till the principal and interest are paidThe market rate of a comparable loan to Mr. Y is 9% per annum The present value of 1at 9% per annum at the end of respective years is as follows: Year ending 31 st March 20 X2 20 X3 20 X4 20 X5 20 X6 20 X7 20 X8 Present Value 0.9174 0.8417 0.7722 0.7084 0.6499 0.5963 0.5470 Under the assumption that no probable future economic benefits except the return of loan has been guaranteed by the employee, you are required to provide the journal entries at the time of initial recognition of loan on 1 st April, 20X1 and as at 31 st March, 20X2.

Suggested Answer and Working Notes:

Journal Entry Date Particulars Dr. ₹ Cr. ₹ 1/4/20X1 Loan to Mr. Y A/c Dr. 10,43,638 Pre-paid employee cost A/c Dr. 1,56,362 To Bank A/c 12,00,000 (Being loan to employee recorded at fair value) 31/3/20X2 Loan to Mr. Y A/c Dr. 93,927 To Finance Income A/c 93,927 (Being finance income @ 9% recorded in the books) 31/3/20X2 Bank A/c Dr. 3,00,000 To Loan to Mr. Y A/c 3,00,000 (Being installment received at the end of the year) Working Notes: 1. Calculation of initial recognition amount of loan to employee Year Estimated Cash Flows ₹ PV Factor @9% Present Value ₹ 31/3/20X2 3,00,000 0.9174 2,75,220 31/3/20X3 3,00,000 0.8417 2,52,510 31/3/20X4 3,00,000 0.7722 2,31,660 31/3/20X5 3,00,000 0.7084 2,12,520 31/3/20X6 40,000 (W.N.2) 0.6499 25,996 31/3/20X7 40,000 (W.N.2) 0.5963 23,852 31/3/20X8 40,000 (W.N.2) 0.5470 21,880 Fair Value of Loan 10,43,638 2. Computation of Interest to be paid Year Opening outstanding balance a Cash Flows b Principal outstanding at year end c Interest @ 4% on a d Cumulative Interest e 31/3/20X2 12,00,000 3,00,000 9,00,000 48,000 48,000 31/3/20X3 9,00,000 3,00,000 6,00,000 36,000 84,000 31/3/20X4 6,00,000 3,00,000 3,00,000 24,000 1,08,000 31/3/20X5 3,00,000 3,00,000 Nil 12,000 1,20,000 31/3/20X6 1,20,000 40,000 (1,20,000/3) 31/3/20X7 40,000 (1,20,000/3) 31/3/20X8 40,000 (1,20,000/3) 3. Computation of finance cost as per amortization table Year Opening Balance (1) ₹ Interest @ 9% (2) ₹ Repayment (3) ₹ Closing Balance (1+2-3) ₹ 1/4/20X1 10,43,638 31/3/20X2 10,43,638 93,927 3,00,000 8,37,565

Topics: Ind AS 109, General

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