Problem 4: (12-month vs.

Lifetime expected credit losses)

Kitten Company issues 3-year loan of P1,000,000 on August 1, 2018. The entity makes the following
estimates of risks and default losses:

Risk of default in

Date Next 12 months Remaining months Loss from default

August 1, 2018 2% 5% 400,000
December 31, 2018 3% 12% 350,000
December 31, 2019 1% 3% 250,000
On August 1, 2018, the entity determines that the loan is not a purchased or originated credit-impaired
financial asset. On
December 31, 2018, the entity determines that the increase in credit risk since initial recognition is
significant but not credit-impaired.

Compute for the amount of impairment loss and loss allowance and provide the journal entry to
recognize impairment loss

on the following dates:

1. August 1, 2018

2. December 31, 2018

3. December 31, 2019