What is LC
Suppose Company wants to purchase goods on credit from a Foreign Party Alex Ltd,USA
Alex Ltd may not trust the company and refuse to give goods on credit.
In this case,Company can take LC (letter of Credit) from his Bank against some security like property
Thus Alex become secure that in case company does not pay,he will get money from Company''s Bank
Entry for LC (Letter of Credit)
Company imported goods worth $100000 from Al Qatar,UAE (Exchange Rate Rs 60/$)
Payment was secured against LC taken from ICICI Bank for 3 months
Bank took 2% Commission to secure the LC
As a security, Bank took Margin in form of FD at 10%
After 3 months, LC was revoked and payment made to party
Pass Entries
Note:-
LC can be for both Imported and Domestic purchases
For Imported purchases,it is called FLC
For local purchases,it is called ILC
View answer
Commission charges on letter of credit :
Commission charges A/c Dr 30000
To Bank A/c 30000
10% Margin money in the form of FD :
8% FD A/c Dr 600000
To Bank A/c 600000
Interest Earned on FD:
8% FD A/c Dr 12000
To Interest Income A/c 12000
At the time letter of credit was revoked and FD was matured:
Bank A/c Dr 612000
To 8% FD A/c 612000
Assumed interest on FD is 8%
Points to Remember:
- No entry is passed for issue of a letter of credit.
- Letter of credit is a contingent liability, hence shown in notes to accounts in financial statements.