Loans Receivable

A claim supported by formal promise to pay but unlike notes receivable, the term loan receivable is used appropriately by entities whose main operations
involve lending of money such as banks and other financing entities.
a. Accounting for loan receivable is similar with that of a note receivable, however loan receivables normally include transaction costs
b. Transaction Costs: incremental costs that are directly attributable to the acquisition, issue or disposal of a financial asset or financial liability.
1. Direct Origination costs: Transactions costs (incurred by the lender) which are directly attributable in originating loans; added to the
carrying amount of the loan and amortized subsequently using the effective interest method
2. Indirect Origination Costs: not directly attributable to the loan and expensed as incurred
3. Origination Fees: service fees (paid by the borrower); deducted from the carrying amount of the loan and amortized subsequently
using the effective interest method

Because of the Direct Origination Costs and Origination Fees, a new effective rate must be computed
-Nominal Rate: Interest Rate stated on the face of the instrument/loan
-Effective Rate: the interest rate that is actually earned or paid on an investment/loan; prevailing rate

Discount: Carrying Amount < Face Amount of the Loan ------ if effective rate > nominal rate
Premium: Carrying Amount > Face Amount of the Loan ------ if effective rate < nominal rate

Example 1: Loan Issued at a discount (Effective Rate higher than Nominal Rate)
On January 1, 2019, XYZ Incorporated extended a loan amounting to 5,000,000 to CC Incorporated. The principal is due after fi ve years while an
interest of 13% is due annually starting December 31, 2019. Other relevant data were as follows:

Direct Origination cost incurred by XYZ 20,900

Indirect origination cost incurred by XYZ 200,000
Origination fees paid by CC 356,970
a. What is the carrying value of the loan on January 1, 2019?
Answer: 4,664,930
Principal 5,000,000
Add: Direct Origination cost incurred by XYZ 20,900
Less: Origination fees paid by CC (355,970)
Carrying value of the loan 4,664,930
Since the carrying value of the loan is lower than its face value, then the loan is said to be issued at a discount. When a loan is issued at a
discount, its effective rate is higher than its nominal rate of 13%. To determine the effective rate of the loan, perform interpolation/trial and error
method (the topic on interpolation was discussed in your senior high school years, kaya hindi ko na siya ilalagay dito sa hand out.) For the trial
and error method, do the following:
1. Since the effective rate would be higher than the nominal rate of 13%, try natin ang 14%.
2. Compute for the PV of 1 @ 14% for 5 periods (0.5194) and the PV of OA of 1 at 14% for 5 periods (3.4331).
3. Multiply the PV of 1 by the Face Value of the note (5,000,000 x 0.5914) and multiply the PV of OA of 1 by the annual interest (650,000 x
3.4331).
4. Add the PV of Principal (2,597,000) and the PV of the interest (2,231,515). Since the total amount is 4,828,515, then the effective rate of the
Loan is still be higher than 14%.
5. Try another interest rate (higher than 14% this time) until such time that the sum of the PV of Principal and the PV of Interest approximates
the carrying value of the loan.
In your examination in Acc 101 (including the CPA Exam – FAR), the effective rates would be given. So hindi niyo na kailangang
mag interpolate or mag trial and error. SKL  However, the topic on interpolation would be needed in your MAS Subjects.

After doing interpolation/trial and error method, the effective rate would approximate 15%. This rate (15%) will be used to amortize the loan.
To solve for the succeeding requirement, prepare an amortization schedule.
Face Value x Nominal Carrying Value x Interest Income – Carrying Value of
rate Effective rate Interest Receivable previous period +
Amortization
Date Interest Receivable Interest Income Amortization Carrying Value/Present
Value
Dec. 31, 2019 - - 0 4,664,930.00
Dec. 31, 2020 650,000.00 699,739.50 49,739.50 4,714,669.50
Dec. 31, 2021 650,000.00 707,200.43 57,200.42 4,771,869.93
Dec. 31, 2022 650,000.00 715,780.49 65,780.49 4,837,650.41
Dec. 31, 2023 650,000.00 725,647.56 75,647.56 4,913,297.98
Dec. 31, 2024 650,000.00 736,994.70 86,994.70 5,000,292.67*
*due to rounding off
If loan are issued at a discount, interest income will be higher than the interest receivable. Upon maturity of
the loan, the Carrying value would equalize its face value.
b. What is the carrying value of the loan on December 31, 2020?
Answer: 4,714,669.50
c. What amount of interest income shall be recognized on December 31, 2021?
Answer: 707,200.43
d. What is the carrying value of the loan on December 31, 2022?
Answer: 4,837,650.41

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Example 2: Loan Issued at a premium (Effective Rate lower than Nominal Rate)
On January 1, 2019, XYZ Incorporated extended a loan amounting to 5,000,000 to CC Incorporated. The principal is due after five years while an
interest of 13% is due annually starting December 31, 2019. Other relevant data were as follows:

Direct Origination cost incurred by XYZ 200,900

Indirect origination cost incurred by XYZ 200,000
Origination fees paid by CC 20,780
a. What is the carrying value of the loan on January 1, 2019?
Answer: 5,180,120
Principal 5,000,000
Add: Direct Origination cost incurred by XYZ 200,900
Less: Origination fees paid by CC (20,780)
Carrying value of the loan 5,180,120
Since the carrying value of the loan is higher than its face value, then the loan is said to be issued at a premium. When a loan is issued at a
premium, its effective rate is lower than its nominal rate of 13%. The effective rate of the loan would approximate 12% .

Face Value x Carrying Value x Interest Income Carrying Value of previous

Nominal rate Effective rate – Interest period + Amortization
Receivable
Collections of Carrying Value/Present
Date Interest Income Amortization
Interest Value
Dec. 31, 2019 - - 0 5,180,120.00
Dec. 31, 2020 650,000.00 621,614.40 (28,385.60) 5,151,734.40
Dec. 31, 2021 650,000.00 618,208.13 (31,791.87) 5,119,942.53
Dec. 31, 2022 650,000.00 614,393.10 (35,606.90) 5,084,335.63
Dec. 31, 2023 650,000.00 610,120.28 (39,879.72) 5,044,455.91
Dec. 31, 2024 650,000.00 605,334.71 (44,665.29) 4,999,790.62*
*due to rounding off
If loan is issued at a premium, interest income will be lower than the interest receivable. Upon maturity of the
loan, the Carrying value would equalize its face value.

b. What is the carrying value of the loan on December 31, 2020?

Answer: 5,151,734.40
c. What amount of interest income shall be recognized on December 31, 2021?
Answer: 618,208.13
d. What is the carrying value of the loan on December 31, 2022?
Answer: 5,084,335.63
Example 2 is for illustration purposes only. Bihira/hindi siya nangyayari in real life. In this case, nagpautang
si XYZ ng 5,000,000 tapos gumastos pa siya ng 200,900. So in total, 5,200,900 yung nagastos niya pero
ang babalik lang sa kanya is 5,020,780. It is impossible to find a financial institution who will lend money
lower than the effective rate because they would be lending money at a loss.

Impairment of Loan (for better understanding, read discussions about time value of money)
Financial assets measured at amortized cost is impaired if there is objective evidence of impairment as a result of a loss ev ent and that such event
has an impact on the estimated future cash flows of the financial asset that can be measured reliably. Simply stated, an asset is deemed impaired
when the receivable is deemed uncollectible (or the recoverable amount of the loan is less than its carrying value).
A. Indicators of impairment (loss events)
1. Significant financial difficulty; the borrower may enter bankruptcy
2. Breach of contract
B. Impairment Loss: Recoverable Amount less Carrying Amount of the Loan before impairment
1. Recoverable Amount: PV of estimated future cash flows using the original effective rate
2. Carrying amount before impairment: Principal amount plus recorded accrued interest receivable (if unrecorded/company ceased
accruing interest, do not include)
C. Allowance for loan impairment: Impairment Loss – Accrued Interest Income (only those recorded)
The allowance for loan impairment is amortized using the original effective rate throughout the period wherein the borrower
defaulted.
D. Carrying amount after impairment: Principal less balance of Allowance for loan impairment or prepare an amortization schedule

Example 3: On January 1, 2019, XYZ Incorporated loaned 5,000,000 to DDD Incorporated which is due on January 1, 2024. 12% interest is due
annually starting December 31, 2019.
As of December 31, 2023, DDD Incorporated is already delinquent with respect to their interest payment for the past 2 years (2022 and 2023). The
loan was assessed and was determined to be impaired. Based on assessment, interest accruing on the loan for the past two years would not be
collectible, however, the principal would be collectible in five equal annual installments of 1,000,000 starting December 31, 2024. Based on records,
only the interest for the year 2022 was accrued but the interest accruing for the year 2023 was not recorded. The prevailing rate on December 31,
2023 was 15%.

a. What amount shall be recognized as impairment loss on the receivable?

Answer: 1,995,200

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 To determine the impairment loss, the recoverable amount as well as the carrying value shall be determined.
Recoverable amount is equal to PV of future cash flows. Kapag sinabing future cash flows, ito na lang yung makokolekta sa loan. Based
on the problem, hindi na raw mako-collect pa si interest, pero yung principal is still collectible. Thus, yung future cash flows natin is equal to
5,000,000, but since ang kailangan is discounted, we need to use Present Value factors.
What PV Factor shall XYZ use (PV of 1 or PV of OA)? The loan was originally payable lump sum, however because of the impairment, the
loan would now be collectible in installment. Based on the new arrangement, the PV of OA based on the original effective rate (12%) will be
used.

Annual Collection 1,000,000

PV of OA at 12% for 5 periods 3.6048
Present Value of Future Cash Flows 3,604,800

Carrying amount of the loan before impairment is equal to the principal amount plus the recorded accrued interest. Only the interest on
2022 was recorded, therefore siya lang ang considered.
Principal 5,000,000
Accrued interest in 2022 600,000
Carrying value of loan before impairment 5,600,000

Impairment Loss
PV of future cash flows 3,604,800
Carrying amount of loan before impairment 5,600,000
Impairment Loss 1,995,200

b. What amount of allowance for loan impairment shall be recognized on December 31, 2023?
Answer: 1,395,200
Impairment Loss 1,995,200
Accrued Interest in 2022 600,000
Allowance for loan impairment 1,395,200
The allowance for loan impairment would be amortized as interest income throughout the period were the borrower made default. In this
case, these period would cover 2024 to 2028 (kasi despite na may utang si DDD kay XYZ, hindi siya magbabayad ng interest).

c. What would be the carrying value of the loan on December 31, 2023, after recognizing impairment loss?
Answer: 3,604,800 (5,000,000 less 1,395,200)

d. What is the carrying value of the loan on December 31, 2025?

Answer: 2,401,861.12

Carrying Value of
Carrying Value x Annual Collection
the previous year -
12% – Interest Income
Amortization
Date Annual Collection Interest Income Amortization Carrying Value
Dec. 31, 2023 - - 0 3,604,800.00
Dec. 31, 2024 1,000,000.00 432,576.00 567,424.00 3,037,376.00
Dec. 31, 2025 1,000,000.00 364,485.12 635,514.88 2,401,861.12
Dec. 31, 2026 1,000,000.00 288,223.33 711,776.67 1,690,084.45
Dec. 31, 2027 1,000,000.00 202,810.13 797,189.87 892,894.59
Dec. 31, 2028 1,000,000.00 107,147.35 892,852.65 41.94

Example 4: On January 1, 2019, XYZ Incorporated loaned 5,000,000 to DDD Incorporated. The loan is payable in five equal annual installment of
1,000,000 starting December 31, 2019. In addition, interest of 12 % is also collectible annually starting December 31, 2019.
DDD was able to make the required payments on 2019 and 2020. However, for the year 2021, DDD experienced financial setbacks thus they were
not able to make the required annual payments of interest and principal. The loan was then then reassessed by XYZ and it was determined to be
impaired. Based on the assessment, interest accruing on the note would not be collectible but the principal amount would be collected in full after three
years (December 31, 2024). Interest for the year 2021 was not accrued and the prevailing rate on December 31, 2021 was 14%.

a. What amount shall be recognized as impairment loss on the receivable?

Answer: 864,600

The expected future cash flows would only be for the remaining balance of the Principal (interest would not be collectible). Since the unpaid
portion would be collectible lump sum, use the PV of 1 when determining the PV of future cash flows.
Balance of Principal (5,000,000 - 2,000,000) 3,000,000
PV of 1 at 12% for 3 periods 0.7118
Present Value of Future Cash Flows 2,135,400

Interest was not recorded for 2021, thus it will not be considered in the computation of the Carrying value of the loan before impairment.
Principal 3,000,000
Recorded Accrued interest in 2021 0
Carrying value of loan before impairment 3,000,000

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 Impairment Loss
PV of future cash flows 2,135,400
Carrying amount of loan before impairment 3,000,000
Impairment Loss 864,600

b. What amount of allowance for loan impairment shall be recognized on December 31, 2023?
Answer: 864,600
Impairment Loss 864,600
Accrued Interest in 2021 0
Allowance for loan impairment 864,600
If there were no recorded accrued interest for the loan, allowance for the loan impairment would be equal to the impairment loss

c. What would be the carrying value of the loan on December 31, 2021, after recognizing impairment loss?
Answer: 2,135,400 (3,000,000 less 864,600)

d. What is the carrying value of the loan on December 31, 2023?

Answer: 2,678,645.76
Carrying Value Previous
Carrying Value x 12% Interest Income
Period + Amortization
Date Interest Income Amortization Carrying Value
Dec. 31, 2021 - 0 2,135,400.00
Dec. 31, 2022 256,248.00 256,248.00 2,391,648.00
Dec. 31, 2023 286,997.76 286,997.76 2,678,645.76
Dec. 31, 2024 321,437.49 321,437.49 3,000,083.25*
*Due to rounding off

Example 5: On January 1, 2019, XYZ Incorporated loaned 5,000,000 to DDD Incorporated. The loan is collectible after a period of five years (December
31, 2024) and a 12% interest would be collectible annually starting December 31, 2019.
DDD was able to make the required payments of interest on 2019. However, the following year, DDD experienced financial setbacks thus they were
not able to make the required annual payment of interest on 2020. The loan was then reassessed by XYZ and it was determined to be impaired. DDD
renegotiated the loan and the following were agreed upon:
- The principal amount of the loan would be payable in full after five years (December 31, 2025)
- Interest payment would resume on December 31, 2024 until the payment of its principal on December 31, 2025
Interest for the year 2020 was not accrued by XYZ and the prevailing rate on December 31, 2020 was 14%.

a. What amount shall be recognized as impairment loss on the receivable?

Answer: 1,441,260

Recoverable amount. The future cash flows with respect to the loan would be equal to the Principal Amount and the Interest for a period of
two years.
The principal will be collectible after a period of five years, thus use PV of 1.
The interest will resume collection on December 31, 2024. Since the interest which will be received on 2024 was four years after the loan
was assessed for impairment, this will be discounted using PV of 1 for 4 periods and the 2025 collection of interest will be discounted using
5 periods

Principal (5,000,000 x 0.5674) 2,837,000

Interest 2024 (600,000 x .6355) 381,300
Interest 2025 (600,000 x .5674) 340,440
Present Value of Future Cash Flows 3,558,740

Carrying amount of the loan before impairment

Principal 5,000,000
Accrued interest in 2020 0
Carrying value of loan before impairment 5,000,000

Impairment Loss

PV of future cash flows 3,558,740

Carrying amount of loan before impairment 5,000,000
Impairment Loss 1,441,260

b. What amount of allowance for loan impairment shall be recognized on December 31, 2020?
Answer: 1,441,260
The allowance for loan impairment would be amortized for a period of three years (2021, 2022 and 2023) only at hindi hanggang December
31, 2025. The Allowance for loan impairment shall be recognized throughout the period that the borrower made defaults. In this case, default
occurred for the periods of 2021 to 2023 with respect to the interest payment (interest payment only resumed on 2024, meaning by 2021 to
2023, walang marereceive na interest payment si XYZ mula kay DDD).

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 c. What would be the carrying value of the loan on December 31, 2022?
Answer: 4,464,083.46

d. What amount of interest income shall be recognized on December 31, 2023?

Answer: 535,690.01

Date Interest Income Amortization Carrying Value

Dec. 31, 2020 - 0 3,558,740.00
Dec. 31, 2021 427,048.80 427,048.80 3,985,788.80
Dec. 31, 2022 478,294.66 478,294.66 4,464,083.46
Dec. 31, 2023 535,690.01 535,690.01 4,999,773.47
- Hanggang 2023 lang ang amortization schedule. By 2024, magiging normal na kasi ang lahat (balik sa dati).

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 Receivable Financing

-ability of a firm to generate cash from its receivables prior to their scheduled date of payments/maturity
-Refer to the book for illustrations
Forms of Receivable Financing
1. Pledging (Hypothecation): receivables are used as collaterals for loans
a. Pledging of receivables does not qualify as transfer of receivables because the pledgor/borrower retains control over the receivables
b. In pledging, receivables are not derecognized, reclassified nor identified, only a disclosure in the notes is required to inform users of the
financial statements that receivables are used as security; total receivables will not be affected after pledging receivables

2. Assignment: formal form of pledge wherein the receivables pledged are specifically identified. Assignment may be on a Notification or a Non-
Notification basis
- In assignment of receivables, the accounts receivable are not derecognized but are reclassified (accounts receivable-assigned) thus,
the balance of the accounts receivable immediately after assignment will not be affected (will not increase nor decrease).
- The equity on assigned accounts (Accounts Receivable-Assigned – Balance of the Loan) will be disclosed in the notes to the financial
statements
- FAQ’s: 1) Cash Proceeds from assignment; 2) Equity on assigned Accounts and 3) Final Settlement
a. Non-notification basis: debtors whose receivables have been assigned are not notified, thus the debtor will continue to make payments
to the assignor(company assigning the receivables)
b. Notification basis: debtors are informed, thus payments will be made directly to the assignee(lender/the company to whom the
receivables are assigned)

3. Factoring: Involves the outright sale of receivables to a financing institution known as a factor. Factoring may be done without recourse or
with recourse
a. Factoring without recourse: the factor assumes the risk of loss from non-collection. Thus, once a factoring arrangement is completed,
the entity has no further involvement with the receivables, unless the customer decides to return the merchandise.
b. Factoring with recourse: the transferor of receivables guarantees payment to the factor in the event that the debtor fails to pay. A
recourse liability will be recognized and would be included in the computation of loss on factoring.
c. Loss on factoring = Carrying value of receivables – (Cash Proceeds + Factors Holdback); if factoring is done with recourse, include the
recourse liability as part of the loss
d. Cash Proceeds = Accounts receivable factored – Service Charge – interest charges – factors holdback
- In factoring, rights over the receivables factored are surrendered/transferred, thus the receivables shall be derecognized. Meaning,
it shall be excluded from the balance of receivables presented in the financial statements.
- Factor’s Holdback is an amount retained by the factor which serves as a protection from possible sales returns and allowances.
Every time that a return or allowance is granted to a customer, this amount will be reduced. The seller of merchandise is still
responsible for sales returns whether factoring is with recourse or without recourse. Take note, a factors holdback is a protection
from sales returns and not from uncollectible accounts.
- FAQ’s: 1) Cash Proceeds; 2) Loss on Factoring and 3) Final settlement (how much will be received from the factors holdback)

4. Discounting of note: the holder of the note endorses a note receivable to a bank in exchange of the maturity value of the note less a discount
a. Discounting without recourse: the holder of the note assumes no further liability, it is essentially an outright sale of notes receivable. In
case the note is dishonored, the entity who endorsed the note will not be held liable
b. Discounting with recourse:
1. Conditional sale: a contingent liability is recognized and disclosed in the notes to financial statement which is equal to the face
value of the note
2. Secured borrowing: a liability is recognized to be presented on the statement of financial position which is equal to the face value
of the note discounted
Conditional sale Secured Borrowing
Effects on the liability section of the -No effect on liability -Increase in liability
financial statement -A contingent liability is recognized but is -A separate liability is recognized and
only disclosed included in the statement of financial
position
Cash Cash
Loss on discounting Interest Expense
NR- discounted Liability for NR Discounted
Interest Income Interest Income
Loss Loss on discounting is recognized if net The difference between the net
proceeds is lower than its carrying value proceeds and carrying value of the note
is recognized as interest expense
If note is dishonored The contingent liability is derecognized The liability is derecognized

Accounts Receivable (Maturity Value + Accounts Receivable (Maturity Value +

Protest Fee) Protest Fee)
Cash Cash

NR-Discounted Liability for NR-Discounted

Notes Receivable Notes Receivable

1. Maturity value = Principal + (Principal x interest rate x term of the note)

2. Discount = Maturity Value x discount rate x unexpired term of the note
3. Net proceeds = Maturity value - discount
4. Carrying value of the note = Principal + ( Principal x interest rate x expired term of the note)
5. Loss = Net proceeds – carrying value of the note
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