Accounting Online Program Certification Practice Test

What is the treatment of a loan extended to a partnership without a formal agreement regarding interest?

1. Interest at 2%

2. No interest

3. Interest at 5%

4. Variable interest

The correct answer is: Interest at 5%

When a loan is extended to a partnership without a formal agreement regarding interest, the general practice is not to impose a specific interest rate unless otherwise specified or agreed upon. In many jurisdictions, the law defaults to treating such loans as interest-free unless there is evidence to the contrary. If the parties involved have not discussed or documented an interest rate, then typically, no interest would be accrued on the loan. The absence of a formal agreement means there is no contractual obligation to pay interest, which aligns with the option indicating "no interest." The mention of specific interest rates, such as 2% or 5%, lacks context or backing in the absence of a formal agreement. Similarly, the variable interest option implies an agreement or understanding that would not exist without prior discussion regarding the terms of the loan. In summary, the correct approach under these circumstances typically defaults to no interest being charged, reflecting the informal nature of the arrangement.