Impairment of Receivables

Bobbie Bank granted a loan to a borrower in the amount of P10, 000,000 on January 1,
2019. The interest rate on the loan is 10% payable annually starting December 31,
2019. The loan matures in five years on December 31, 2023. Bobbie Bank incurs
P130,900 of direct loan origination cost and P50,000 of indirect loan origination cost. In
addition, Bobbie Bank charges the borrower a 5-point nonrefundable loan origination
fee.

The borrower paid the interest due on December 31, 2019. However, during 2020 the
borrower began to experience financial difficulties, requiring the bank to reassess the
collectability of the loan. As of December 31, 2020, the bank expects that only
P8,000,000 of the principal will be recovered. The P8,000,000 principal amount is
expected to be collected in two equal installments on 'December 31, 2022 and
December 31, 2024. The prevailing interest rates for similar type of note as of
December 31, 2019 and 2020 are 15% and 16%, respectively.

REQUIRED:

Determine the following:

1. Interest income to be recognized in 2019

2. Carrying amount of the loan as of December 31, 2019

3. Loan impairment loss to be recognized in 2020 •

SOLUTION:
Requirement No. 1 & 2

Principal 10,000,000
Direct origination cost 130,900
Origination fee received from borrower (P10M x .05) (500,000)
Carrying amount, 1/1/19 9,630,900

Amortization schedule

Date EI(11%) NI (10%) Disc. Amort. C.A.

1/1/19 9,630,900
12/31/19 1,059,399 1,000,000 59,399 9,690,299
12/31/20 1,065,933 1,000,000 65,933 9,756,232
12/31/21 1,073,186 1,000,000 73,186 9,829,418
12/31/22 1,081,236 1,000,000 81,236 9,910,654
12/31/23 1,089,346 1,000,000 89,346 10,000,000

Requirement No. 3

Carrying amount, 12/31/20 (see schedule) 9,756,232

Less PV of expected cash flows:
12/31/22 (P4M x 0.8116) 3,246,400
12/31/24 (P4M x 0.6587) 2,634,800 5,881,200
Loan impairment (bad debt expense) 3,875,032