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Loans-Receivable-Problems

BSA (Batangas State University)

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Problem 7-1

Nasty bank granted a loan to a borrower on January 1, 2020. The interest on

the loan is 10% payable annually starting December 31, 2020. The Loan
matures in 3 years on December 31, 2020.

Principal Amount 4,000,000

Direct Origination 150,000
Origination fee received from the borrower 342,100

After considering the origination fee received from the borrower and the
direct origination cost incurred, the effective rate on the loan is 12%.
Required:
Prepare journal entries for 2020, 2021, 2022.

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7-1 Answer:

Solution:
Principal Amount 4,000,000
Origination Fee received from the borrower (342,100)
Direct Origination cost incurred 150,000

Initial Carrying amount of loan 3,807,900

Journal Entries- January 1, 2020

1. to record the loan:

Loan Receivable 4,000,000
Cash 4,000,000
2. to record the origination fees received from the borrower:
Cash 342,100
Unearned Interest Income 342,100
3. to record the direct origination cost incurred by the bank:
Unearned Interest Income 150,000
Cash 150,000

Amortization Table

INTEREST AMORTIZATION
INTEREST INCOME
RECEIVED (Interest
(Carrying CARRYING
DATE (Principal received –
Amount*Effective AMOUNT
Amount*Nominal Interest
rate
rate) Income
Jan. 1, 2020 3,807,900
56,948
Dec. 31, 400,000 456,948
(400,000 – 3,864,848
2020 (4,000,000*10%) (3,807,900*12%)
456,948)
63,781.76
Dec. 31, 400,000 463,781.76
(400,000 – 3,928,629.76
2021 (4,000,000*10%) (3,864,848*12%)
463,781.76)
Dec. 31. 400,000
471,370.24 71,370.24 4,000,000
2022 (4,000,000*10%)

1.
Journal Entry- December 31, 2020
Cash 400,000
Interest Income 400,000

Unearned Interest Income 56,948

Interest Income 56,948

Journal Entry- December 31, 2021

Cash 400,000
Interest Income 400,000

Unearned Interest Income 63,781.76

Interest Income 63,781.76

Journal Entry- December 31, 2022

Cash 400,000
Interest Income 400,000

Unearned Interest Income 71,370.24

Interest Income 71,370.24

Cash 4,000,000
Loan Receivable 4,000,000

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Problem 7-2

Awesome Bank granted a loan to a borrower on January 1, 2020. The interest

rate on the loan is 10% payable annually starting December 31, 2020. The
loan matures in 5 years on December 31, 2024.

Principal Amount 4,000,000

Direct Origination 61,500
Origination fee received from the borrower 350,000

Required:
1. Compute the carrying amount of the loan receivable on January 1, 2020.
2. Prepare a table of amortization for the loan receivable.
3. Prepare the journal entries for 2020 and 2021.

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7-2 Answer:

Solution:

1.
Principal Amount 4,000,000
Origination Fee received from the borrower (350,000)
Direct Origination cost incurred 61,500

Initial Carrying amount of loan 3,711,500

Journal Entries- January 1, 2020

1. to record the loan:

Loan Receivable 4,000,000
Cash 4,000,000
2. to record the origination fees received from the borrower:
Cash 350,000
Unearned Interest Income 350,000
3. to record the direct origination cost incurred by the bank:
Unearned Interest Income 61,500
Cash 61,500

2.
Amortization Table
INTEREST AMORTIZATION
INTEREST INCOME
RECEIVED (Interest
(Carrying CARRYING
DATE (Principal received –
Amount*Effective AMOUNT
Amount*Nominal Interest
rate
rate) Income
Jan. 1,
3,711,500
2020
45,380
Dec. 31, 400,000 445,380
(400,000 – 3,756,880
2020 (4,000,000*10%) (3,711,500*12%)
445,380)
50,825.6
Dec. 31, 400,000 450,825.6
(400,000 – 3,807,705.6
2021 (4,000,000*10%) (3,756,880*12%)
450,825.6)
56,924.7
Dec. 31, 400,000 456,924.7
(400,000 – 3,864,630.3
2022 (4,000,000*10%) (3,807,705.6*12%)
456,924.7)
63,755.6
Dec. 31, 400,000 463,755.6
(400,000 – 3,928,385.9
2023 (4,000,000*10%) (3,864,630.3*12%)
463,630.3)
Dec. 31, 400,000
471,614.1 71,614.1 4,000,000
2024 (4,000,000*10%)

3.
Journal Entry- December 31, 2020
Cash 400,000
Interest Income 400,000

Unearned Interest Income 45,380

Interest Income 45,380

Journal Entry- December 31, 2021

Cash 400,000
Interest Income 400,000

Unearned Interest Income 50,825.6

Interest Income 50,825.6

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Problem 7-3

Pauper Bank granted a loan to a borrower on January 1, 2020. The interest

on the loan is 8% payable annually starting December 31, 2020. The loan
matures in 3 years on December 31, 2022.

Principal Amount 3,000,000

Direct Origination 260,300
Origination fee received from the borrower 100,000

After considering the origination fee charged to the borrower and the
direct origination cost incurred, the effective rate on the loan is 6%.
Required:
1. Prepare journal entries for 2020, 2021, 2022.
2. Present the loan receivable on December 31, 2020.

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7-3 Answer:
Solution:

Direct Origination Cost Incurred 260,300

Origination Fee received (100,000)
Net Direct Origination Cost 160,300
Loan Receivable 3,000,000

Carrying Amount of Loan Receivable- Jan. 1, 2016 3,160,000

Principal Amount 3,000,000

Origination Fee received from the borrower (100,000)
Direct Origination cost incurred 260,300

Initial Carrying amount of loan 3,160,300

INTEREST AMORTIZATION
INTEREST INCOME
RECEIVED (Interest
(Carrying CARRYING
DATE (Principal received –
Amount*Effective AMOUNT
Amount*Nominal Interest
rate
rate) Income
Jan. 1,
3,160,300
2020
Dec. 31, 240,000 189,618 50,382
3,109,918
2020 (3,000,000*8%) (3,160,300*6%)
Dec. 31, 240,000 186,595.08
53,404.92 3,056,513.08
2021 (3,000,000*8%) (3,109,918*6%)
Dec. 31. 240,000
183,486.92 56,513.08 4,000,000
2022 (3,000,000*8%)

1.
Journal Entry- January 1, 2020
Loan Receivable 3,000,000
Cash 3,000,000

Cash 100,000
Direct Origination Cost 100,000

Direct Origination Cost 260,300

Cash 260,300

Journal Entry- December 31, 2020

Cash 240,000
Interest Income 240,000

Interest Income 50,382

Direct Origination Cost 50,382

Journal Entry- December 31, 2021

Cash 240,000
Interest Income 240,000

Interest Income 53,404.92

Direct Origination Cost 53,404.92

Journal Entry- December 31, 2022

Cash 240,000
Interest Income 240,000

Interest Income 56,513.08

Direct Origination Cost 56,513.08

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2.
Loan Receivable 3,000,000
Direct Origination Cost-Dec. 31, 2020
(D.O.C-Jan.1,2020- Amortization of 2020)
(160,300 – 50,382) 109,918

Loan Receivable- Dec. 31,2020 3,109,918

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Problem 7-10

Solid Bank loaned Php5,000,000 to a borrower on January 1, 2018. The term

of the loan requires principal payments of Php1,000,000 each year for 5
years plus interest at 8%.

The first principal and interest payment is due on January 1, 2019. The
borrower made the required payments during 2019 and 2020.

However, during 2020 the borrower began to experience financial

difficulties, requiring the bank to reassess the collectability of the
loan.

On December 31, 2020, the bank has determined that the remaining principal
payment will be collected as originally scheduled but the collection of the
interest is unlikely.

The bank did not accrue the interest on December 31, 2020.
Present Value of 1 at 8%

For one period 0.926

For two periods 0.857
For three periods 0.794

1. What is the impairment loss of 2020?

a. 423,000 c. 222,000
b. 217,000 d. 0

2. What is the interest income for 2021?

a. 126,160 c. 222,000
b. 142,640 d. 0

3. What is the carrying amount of the loan receivable on December 31, 2021.
a. 2,000,000 c. 1,640,360
b. 1,925,640 d. 1,783,000

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7-10 Answer:
1. B. 217,000
Solution:
Jan. 1, 2021 collection (1,000,000*1.000) 1,000,000
Jan. 1, 2022 collection (1,000,000*0.926) 926,000
Jan. 1, 2023 collection (1,000,000*0.857) 857,000
Total present value of loan 2,783,000

Loan Receivable 3,000,000

Present Value of Loan (2,783,000)
Impairment Loss 217,000

Journal Entry:
Impairment Loss 217,000
Allowance for Loan Impairment 217,000

2. B. 142,640
Solution:
Loan Receivable 3,000,000
Collection on January 1, 2021 (1,000,000)
Loan Receivable- Jan. 1, 2021 2,000,000
Allowance for Loan Impairment (217,000)
Carrying Amount of January 1, 2021 1,783,000

Interest Income for 2021: 142,640

(Carrying Amount, Jan. 1, 2021* Interest Rate)
1,783,000 * 8% = 142,640

3. B. 1,925,640
Solution:
Loan Receivable- December 31, 2021 2,000,000
Allowance for Loan Impairment
(Allow. For Loan Impairment, Jan. 1, 2021 217,000
Interest Income for 2021 (142,640) (74,360)
Carrying Amount- Dec. 31, 2021 1,925,640

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Problem 7-11

Global bank loaned P9,000,000 to a borrower on January 1, 2018. The terms

of the loan were payment in full on January 1, 2023, plus annual interest
payment at 12%.

The interest payment was made as scheduled on January 1, 2019. However, due
to financial setbacks, the borrower was unable to make the 2020 interest
payment.

The bank considered the loan impaired and projected the cash flows from the
loan on December 31,2020.

The bank has accrued the interest on December 31, 2019 but did not continue
to accrue interest for 2020 due to the impairment of the loan. The
projected cash flows are:

Amount Projected on December 31,

Date of Cash Flow
2020
December 31, 2021 1,500,000
December 31, 2022 2,000,000
December 31, 2023 2,500,000
December 31, 2024 3,000,000

The present value of 1 at 12% is 0.89 for one period, 0.80 for two periods,
0.71 for three periods, and 0.64 for four periods.

1. What is the loan impairment loss for 2020?

a. 2,370,000
b. 3,450,000
c. 6,630,000
d. 2,450,000

2. What is the interest income for 2021?

a. 795,600
b. 900,000
c. 180,000
d. 0

3. What is the carrying amount of the loan receivable on December 31, 2021?
a. 5,925,600
b. 4,845,600
c. 6,330,000
d. 7,500,000

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7-11 Answer

1. B. 3,450,000
Solution:

Loan Receivable 9,000,000

Accrued Interest Income (9,000,000*12%) 1,080,000
Carrying Amount 10,080,000
Present value of loan (6,630,000)*
Impairment Loss of 2020 3,450,000

Journal entry
Impairment Loss 3,450,000
Accrued Interest Rec. 1,080,000
Allow. For loan impairment 2,370,000
*
Dec. 31, 2021 (1,500,000*0.89) = 1,335,000
Dec. 31, 2022 (2,000,000*0.80) = 1,600,000
Dec. 31, 2023 (2,500,000*0.71) = 1,775,000
Dec. 31, 2024 (3,000,000*0.64) = 1,920,000
Total Present Value of Loan 6,630,000

2. A. 795,600
Solution:
Interest Income for 2021: 795,600
(6,630,000 * 12%)

3. A. 5,925,600
Solution:
Loan Receivable (9,000,000-1,500,000) 7,500,000
Allowancce for Loan Impairment (2,370,000-795,600)
(1,574,000)
Carrying Amount- Dec. 31, 2021 5,925,600

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Problem 7-12

On December 31, 2020; Oregon Bank recorder an investment of P5,000,000 in a

loan granted to a client.

The loan has 10% effective interest rate payable annually every December
31. The principal is due in full at maturity on December 31, 2023.

Unfortunately, the borrower is experiencing significant financial

difficulty and will have difficult time in making full payment.

The bank projected the entire principal will be paid at maturity and 4%
interest or P200,000 will be paid annually on December 31 of the next three
years. There is no accrued interest on December 31, 2020.

The present value of 1 at 10% for three periods is 0.75, and the present
value of an ordinary annuity of 1 at 10% for three periods is 2.49.

1. What is the impairment loss for 2020?

a. 752,000
b. 600,000
c. 250,000
d. 748,000

2. What is the interest income for 2021?

a. 200,000
b. 24,800
c. 224,800
d. 500,000

3. What is the carrying amount of the loan receivable on December 31, 2021?
a. 5,000,000
b. 3,750,000
c. 4,472,800
d. 4,672,800

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7-12 Answer

1. A. 752,000
PV of principal (5,000,000 × 0.75) 3,750,000
PV of interest (200,000 × 2.49) 498,000
Total Present Value 4,248,000
Carrying Amount 5,000,000
Impairment Value 752,000

Journal entry
Impairment loss 752,000
Allowance for loan impairment 752,000

2. B. 224,000
Interest income for 2021(10% × 4,248,000) 424,800
Interest received(4% × 5,000,000) 200,000
Amortization of allowance for loan impairment 224,800

Journal entry
Cash 200,000
Allowance for loan impairment 224,800
Interest Income 424,800

3. C. 4,472,000
Loan receivable – December 31, 2021 5,000,000
Allowance for loan impairment (752,000 – 224,800) (527,200)
Carrying amount – December 31, 2021 4,472,800

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Problem 7-13

On December 31, 2020, London Bank granted a P5,000,000 loan to a borrower

with 10% stated rate payable annually and maturing in 5 years. The loan was
discounted at the market interest rate of 12%.

Unfortunately, the financial condition of the borrower worsened because of

lower revenue.

On December 31, 2022, the bank determined that the borrower would pay back
only P3,000,000 of the principal at maturity.

However, it was considered likely that interest would continue to be paid

on the P5,000,000 loan.

The present value of 1 at12% is 0.57 for five periods and 0.71 for three
periods.

The present value of an ordinary annuity of 1 at 12% is 3.60 for five

periods and 2.40 for three periods.

1. What is the amount of cash paid to the borrower on December 31, 2020?
a. 4,400,000
b. 4,500,000
c. 5,000,000
d. 4,650,000

2. What is the carrying amount of the loan receivable on December 31, 2022?
a. 4,650,000
b. 4,790,000
c. 4,772,960
d. 4,720,000
3. What is the impairment loss on loan receivable to be recognized for
2022?
a. 2,000,000
b. 1,442,960
c. 1,922,960
d. 1,670,000

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7-13 Answer

1. D. 4,650,000
PV of principal (5,000,000 × 0.57) 2,850,000
PV of interest (10% × 5,000,000 × 3.60) 1,800,000
Cash paid to borrower 4,650,000

Principal 5,000,000
Present value 4,650,000
Unearned interest income 350,000

Journal Entry
Loan Receivable 5,000,000
Cash 4,650,000
Unearned Interest Income 350,000

2. C. 4,772,960
Date Interest Interest Amortization Present Value
Received Income (12%)
(10%)
12/31/20 4,650,000
12/31/21 500,000 558,000 58,000 4,708,000
12/31/22 500,000 564,960 64,960 4,772,960

Loan Receivable – December 31, 2022 5,000,000

Unearned Interest Income (350,000 -58,000-64,960) (227,040)_
Carrying Amount – December 31,2022 4,772,960

3. B. 1,442,960
PV of Principal (3,000,000 × 0.71) 2,130,000
PV of Interest (500,000 × 2.40) 1,200,000_
Total present value 3,330,000
Carrying Amount – December 31, 2022 4,772,960_
Impairment Loss 1,442,960

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