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One time settlement

priyesh (student) (86 Points)

23 December 2011

if a loan of rs 10 lac from bank is being setteled in one time by paying rs. 2.5 lac as whole, what will be the entry for the same in accounting books if:-

a) assests has been ceased

b) if no assets has been ceased

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5 Replies

sriram (CA Final) (203 Points)
Replied 23 December 2011

Priyash,

I think when the

assets has been ceased

In the books of Borrower,

Loan A/c Dr 10 Lacs

Reconstruction Account Dr xxxx------- (Loss on Take over if any)

To Reconstruction Account Dr xxxx (Profit on Take Over if any)

To Assets (Value in books) xxxx

To Bank 2.5 Lacs

When assets are not ceased,

Loan Ac Dr 10 Lacs

To Assets 2.5 Lacs

To Reconstruction Ac 7.5 Lacs (Gain recongnize it in Profit and loss).

Check with others whether the above entry's can be recorded.

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Vineet Kumar Sharma (Chartered Accountant) (316 Points)
Replied 24 December 2011

Instead of Reconstruction A/c, it is much better to use Profit & Loss Account.

1 Like

Kolluru Krishna Murty (Partner) (315 Points)
Replied 04 January 2012

I agree with Mr Vineet Kumar,since it is ultimately to be taken to P&L a/c.

But further inputs may be taken from our learned collegues,with regard to Income Tax .

kkm

1 Like

sriram (CA Final) (203 Points)
Replied 07 January 2012

Thank you all for correcting me.

Regard,

Sriram.V

praveen kumar devarapalli (Managing Director) (361 Points)
Replied 07 January 2012

In fact whether assets are seized or not, loan has been settled. For settlement there is two elements

1. Interest portion

2. Principal portion

1. Interest Portion:- If the interest has been accrued and entries are passed, necessary entries need to be revized means reversal entries to be passed for interest portion if interest has been recognised as a expenditure.

2. Principal Portion:- Principal portion gap between loan amount and repayment amount has to be recognized in P&L A/c

Regards,

Praveen Kumar

+91 92 46 46 59 69