PROFITIZE Case Study: How TechCo Recorded Loan Forgiveness

Introduction:

TechCo, a company that manufactures electronic gadgets, had borrowed money from a bank to help finance the development of a new product. However, due to some difficulties, TechCo struggled to repay the loan. Fortunately, the bank decided to forgive the remaining loan balance, meaning TechCo would not have to pay back the rest of the money they owed.

The Situation:

TechCo originally borrowed $50,000 from the bank. They had repaid $30,000, leaving a remaining balance of $20,000. The bank decided to forgive this remaining $20,000, meaning TechCo would no longer owe this money.

Case Facts:

• Original loan amount: $50,000

• Amount already repaid: $30,000

• Remaining loan balance forgiven: $20,000

The Numbers:

• Loan amount forgiven: $20,000

IFRS Journal Entries

Now, let’s think about how TechCo would record this transaction in their accounting books according to IFRS (International Financial Reporting Standards). When the debt is forgiven, TechCo needs to make the following journal entries:

When the loan is forgiven:

Debit: Loan Payable for the amount of the forgiven debt.

Credit: Debt Forgiveness Income (or Other Income) for the same amount.

Can you figure out the IFRS journal entry for this scenario?

Based on the information provided:

When TechCo’s loan is forgiven:

Debit: Loan Payable for $20,000 (to remove the debt from the books)

Credit: Debt Forgiveness Income (or Other Income) for $20,000 (to recognize the income from the forgiveness)

This case study illustrates how debt forgiveness works and how it is recorded in the company’s books. TechCo no longer has to worry about repaying the loan, and their financial statements reflect this positive change by recognizing the forgiveness as income. 

Disclaimer: This case study is designed to enhance digital financial literacy and business management skills among students, to help them apply these concepts in real-world scenarios to boost their earnings, employability and entrepreneurial potential. The case was edited by Razi Amin, a Harvard MBA with 30+ years of leadership and advisory experiences at major international banks in New York, London, Hong Kong and Washington, DC. Razi is also a member of Harvard Alumni for Global Women's Empowerment. While AI technology was used for prompt-engineering to generate case content, every case has been rigorously reviewed and edited to ensure accuracy, clarity, and educational effectiveness. Reproduction of this case material is prohibited without permission from ASPEN Capital Solutions LLC.