You have been provided with extracts from the pre-adjustment trial balance of Citrus Traders (Pty) Ltd as at 30 June 2025. | Debit | Credit | |---|---| | Loan: ABBA Bank (12.5%) | 12 000 000 | | Interest expense | 1 122 000 | | Rent expense | 208 000 | Additional information: 1. The company entered into a loan agreement with ABBA Bank on 1 June 2024. The loan is repayable over 6 years in equal annual instalments, starting on 1 June 2025. 2. The business has been renting the business premises for the whole financial year at an amount of R16 000 per month. The accountant debits the rent expense account when rent payments are made. 3. The accountant debits interest expense when payments are made. REQUIRED: 4.1 Prepare the general ledger loan account of Citrus Traders (Pty) Ltd for the month ended 30 June 2025. * Close off or balance the ledger accounts as at 30 June 2025. (3 marks) 4.2 Prepare any adjusting journal entries that should be processed on 30 June 2025 to process the additional information provided in points 1, 2, and 3 above. * Dates and narrations are not required. (10 marks) 4.3 In terms of the Conceptual Framework, identify what the loan with ABBA Bank will be classified as in the records of Citrus Trades. (7 marks)
Answer (1)
To address the provided scenario, we'll tackle each requirement one by one:
4.1 General Ledger Loan Account
The general ledger for the loan account summarizes the transactions related to the loan during the month of June 2025. Since no specific transactions other than loan repayments are mentioned for the month, the primary focus is on the repayment:
Loan: ABBA Bank Initial Loan Balance (1 June 2024): R12,000,000 First Instalment Paid (1 June 2025): R2,000,000 (assuming equal annual instalments over 6 years: 6 12 , 000 , 000 )
Given that the loan repayment starts on 1 June 2025, the balance for 30 June 2025 is:
Loan Account Balance on 30 June 2025 = R 12 , 000 , 000 − R 2 , 000 , 000 = R 10 , 000 , 000
4.2 Adjusting Journal Entries
Rent Expenses : The company paid R208,000 for rent while it should have been R16,000 per month for 12 months, totaling R192,000. Thus, rent expense is overstated by R16,000:
Adjusting entry: Debit Rent Expense R0, Credit Prepaid Rent or Expense Payable R16,000.
Interest Expense : The interest expense accounting seems accurate for payments, but no specific adjustments are given here, assuming interest calculated and paid align with the loan schedule.
Adjustments might generally be:
If there's accrued interest not recorded:
Debit: Interest Expense (for unpaid June 2025 interest)
Credit: Interest Payable
4.3 Classification According to the Conceptual Framework
Loan Classification : The loan from ABBA Bank will be classified as a liability in the financial records of Citrus Traders. Liabilities represent obligations the business must settle in the future, and here, the loan must be repaid over the agreed period.
Step-by-step, Citrus Traders must ensure all financial records adhere to the correct accounting principles, capture the installments and expenses accurately, and reflect a true picture of their financial situation by 30 June 2025.
