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The outstanding balance in a retired partner’s loan account is increasing over time. What is the most likely reason?

Answer and explanation

Correct answer: Interest is accruing on the loan but has not been paid

Interest is credited on the amount outstanding in a partner’s loan account. If this interest is accrued but not paid, the balance of the loan account increases. Under option B, repayment of principal would reduce the balance; closing the account or settling the entire liability would eliminate the outstanding amount. Exam tip: When a loan-account balance rises, first check whether unpaid interest has been added to it.

Related tags

Partner Loan AccountRetirement Of PartnerInterest On LoanReconstitution Of PartnershipAccounting EntriesPartner's Loan AccountPartner S Loan AccountReconstitution Retirement Or Death Of A Partner

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