Accounting for deferred financing costs

3. Accounting entries for deferred financing costs

Some examples of journal entries in accounting for deferred financing costs are presented below:

Incurred Deferred Financing Costs

Account Titles

Debit

Credit

Deferred Financing Costs

$75,000

 

     Cash (Accounts Payable)

 

$75,000

Obtained Bank Loan (Year 0)

Account Titles

Debit

Credit

Cash

$1,000,0000

 

     Bank Loan

 

$1,000,000

Recorded Amortization of Deferred Financing Costs (Year 1)

Account Titles

Debit

Credit

Debt Issue Expense

$12,710

 

     Deferred Financing Costs

 

$12,710

This entry assumes that the company utilizes the effective interest rate method to amortize deferred financing costs. There will be similar entries for year 2-10 except that the amounts will be different (see the effective interest rate method amortization schedule above).

Make Annual Payment on Bank Loan (Year 1)

Account Titles

Debit

Credit

Interest Expense

$50,000

 

Bank Loan

$79,505

 

     Cash

 

$129,505

This is an example of payment for the first year. The entries for years 2-10 will be similar except that the amounts of interest expense and bank loan reduction will be different (see the loan amortization schedule above).

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