Cash deposit 1000
HP advance 9200
HP initial fee 100
Final fee 80
Charge for interest 2000
The deposit will be posted as
Cr cash 1000
Dr Motor 1000
Then bring in the HP to correct the motor value and create the initial loan advance
Cr HP 9200
Dr RFL 200
DR Motor 9000
Then adjust for HP initial fee
Dr HP charges 100
Cr HP 100
Then depending whether you are using straight line basis, or rule of 78, for interest, at the end of year one you will make an adjustment for the interest which is dependant on the number of repayments made.
In year two, you will adjust for 12 months interest, and so on, until the final year where it will again be based on the payments made, in this year, and you will also journal in the final fee.
Here's an explanation of rule of 78 which I posted a while back...
The rule of 78 means that more interest is charged in the earlier years, because there is more debt outstanding at that point. The benefit of using it, is that you get more tax relief in the first years of the loan.
Using a 36 month loan as an example, I will make an attempt to explain how I do this, bear with me!
I open a spreadsheet and write in the first column
1
2
3
4
All the way to 36. Then I use autosum to add it together = 666
I then use formulas to calculate the yearly factor and interest...
Calculate the number of monthly repayments made in your first year. Lets say that was 3 months.. you start at the bottom and would add 36+35+34 = 105
Lets say your total interest on the loan over the period was £1000, the interest calculation for the first year of the loan would be £1000 x105/666 = £157.65
Had you divided the interest by 36, then the 3 months charge would only be £83.33
In the second year you will made 12 payments so you calculate from 33+32+31+30+29+28+27+26+25+24+23+22 = 330
So for the second year, your interest charged is £1000 x 330/666 = 495.50
Had you used straight line basis it would be only £333.33
Year 3 would show 21+20+19+18+17+16+15+14+13+12+11+10 = 186
So year 3's interest would be £1000 x 186/666 = 279.28
In year 4, you would pay the remaining 9 installments and you interest calc would be based on 9+8+7+6+5+4+3+2+1 = 45
Monthly payments straight to HP then journal interest at the end of the year from HP to expenses.
In your rule 78 calculation on a 5 year loan first year over 7 months I would have 2500 x 399/1830 = £545.08 (77.87 a month) as opposed to £291.66 on straight line interest. (£41.67 a month)
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John
Any advice given is for general guidance and professional advice should be sought applicable to your circumstances.
