USA Church Never Recorded Loan Or Assets

[Katie Tish]

I am working with a church that has a loan with an outstanding balance that was never booked. The loan was used to purchase assets that were never recorded. The church has been unable to provide me with a list of assets. They currently budget the loan payment and expense both principal and interest. They also have an equity account for designated donations that are paid towards the loan principal. Each month they pay their normal monthly payment plus any designated donations received. I would like to record the loan but want to make sure I'm thinking this through correctly. These are the entries I'd like to make:

To record assets/loan:
Debit: Asset Account for loan balance
Credit: Long Term Loan Liability

To record monthly loan payments:
Debit: Long Term Loan Liability (for principal)
Debit: Interest Expense
Credit: Cash

To record depreciation:
Debit: Equity account (for monthly principal designated donations)
Debit: Depreciation expense
Credit: Accumulated Depreciation

I know that depreciation is normally based on the asset's life but this church wants to see the budgeted P&I payment reflected on their income statement. Am I totally off base handling things this way?

 

[Steve-LevelUp]

First, you would need to convince the church leadership that showing loan payments on the P&L is not the correct way to reflect this. Then, if you are able, you need to go back and re-state prior year statements, back to the time when the loan was first originated. The asset and loan would then be recorded at their full balance and brought down to their current balance based on the payments made.

Depreciation would not impact the equity account. This would only be the case if you were not able to re-state past years. Then, the equity account would be entered differently. When setting up the asset, the entry would be for the original entry, not the current balance. So, if you need to make the correction to the current year, then

Dr. Asset (original balance)
Cr. Loan, current balance
Cr. Accumulated Amortization
Dr. Equity

You would need to calculate what the accumulated amortization should be for the period that the entry occurs.

I hope this helps.

 

[Katie Tish]

Thank you! I think it will be tough to convince leadership that showing loan payments on the P&L is incorrect but I will start there.

 

[kirby]

For my two cents:
I have a real problem when the Church's leadership's answer to "what asset did you get for the loan?" Is "I dunno".
In that case, I'd say "OK, guys. I can't book an imaginary asset. So the offset to the loan payable is Expense."
Maybe that will help jog some memories or cause them to be in the mood to help you.

 

[Fidget]

Gut instinct on the face of it, is that a loan as been taken out for the purchase of personal assets and is being paid off through the church's money.

It just reeks of somebody on the fiddle, or perhaps, 'immaculate deception' in church-speak.