LOAN PAYOFF ADJUSTMENT

[jorja920]

We refinanced a building loan to get more working capital for our construction. I need help in recording the two loans.
Current loan: $305,035.25.
Payoff of loan: $304,842.17.
Difference: $ 193.08
New Loan: $340,000.00
I'm stumped as to how I should show the old loan was paid with the new loan with the difference of $193.08. I don't know what account should be used for DB/CR to account for the $193.08 amount.
There are also several other fees which I have put in a loan fee expense and interest expense account. I would greatly appreciate any help.
Thanks,

[JohnDMeyers]

If the new load is from a different financial institution, you will receive the money into checking and pay it out again. If it is from the same institution, you can combine these two transactions into one.

Receive new loan:
DB checking $304,842.17
CR liability "new loan account" $304,842.17

DB liability "old loan account" $304,842.17
CR checking $304,842.17

(you could just DB "old loan" and CR "new loan" if no money actually changed hands).

That leaves a balance of $193.08 in the "old loan account". Apparently, you have been forgiven the difference.

You can record the forgiveness either as a non-cash income:
DB "old loan account" $193.08
CR income account "non-cash forgiveness of debt" $193.08

or you can CR an equity account. If you are using 01-3110-000, you could use a sub-account 01-3110-101 "forgiven debt", or create 01-3112-000 "forgiven debt"

I'll demonstrate with the sub-account
DB "old loan account" $193.08
CR 01-3110-101 "forgiven debt" $193.08

I would probably use the income account. If you have an accountant that you consult, you could ask their advice.

[jorja920]

Thanks John, your answer confirmed my original method of processing these transactions, I was just confused as to the equity account process. You've solved my problem.
Thanks