LOANS

2. Present the loan receivable on December 31, 2021.

RECEIVABLE PROBLEM 7-4

On January 1, 2021, Empress Bank granted a loan to a
borrower. The interest on the loan is 10% payable annually on
Source: Intermediate Accounting 1 by Valix (2021 ed)
December 31, 2021. The loan matures in three years on
PROBLEM 7-1 December 31, 2023.

Nasty Bank granted a loan to a borrower on January 1, 2020. Principal amount 5,000,000
The interest on the loan is 10% payable annually starting Direct origination cost incurred 457,500
December 31, 2021. The loan matures in three years on Origination fee charged against the 200,000
December 31, 2023. borrower

Principal amount 4,000,000 After considering the origination fee charged against the
Direct origination cost incurred 150,000 borrower and the direct origination cost incurred, the effective
Origination fee received from the 342,100 rate on the loan is 8%.
borrower
Required:
After considering the origination fee received from the
1. Determine the carrying amount of the loan on January
borrower and the direct origination cost incurred, the effective
1, 2021.
rate on the loan is 12%.
2. Prepare a table of amortization of the direct
Required: origination cost.
3. Prepare journal entries for 2021, 2022, and 2023.
Prepare journal entries for 2021, 2022, and 2023.
PROBLEM 7-5
PROBLEM 7-2
Solvent Bank loaned P10,000,000 to a borrower on January 1,
Awesome Bank granted a loan to a borrower on January 1, 2019. The terms of the loan require principal payments of
2021. The interest rate on the loan is 10% payable annually P2,000,000 each year for 5 years plus interest at 8%.
starting December 31, 2021. The loan matures in five years on
December 31, 2025. The first principal and interest payment is due on December
31, 2019. The borrower made the required payments on
Principal amount 4,000,000 December 31, 2019 and December 31, 2020.
Direct origination cost 61,500
Origination fee received from borrower 350,000 However, during 2021 the borrower began to experience
financial difficulties, requiring the bank to reassess the
The effective rate on the loan after considering the direct collectability of the loan.
origination cost and origination fee received is 12%.
On December 31, 2021, the bank has determined that the
Required: remaining principal payments will be collected but the
1. Compute the carrying amount of the loan receivable collection of the interest is unlikely. The bank has accrued the
on January 1, 2021. interest for 2021.
2. Prepare a table of amortization for the loan Expected Principal Payments
receivable. December 31, 2022 1,000,000
3. Prepare the journal entries for 2021 and 2022. December 31, 2023 2,000,000
December 31, 2024 3,000,000
PROBLEM 7-3
Pauper Bank granted a loan to a borrower on January 1, 2021. Present value of 1 at 8%
The interest on the loan is 8% payable annually starting For one period 0.93
December 31, 2021. The loan matures in three years on For two periods 0.86
December 31, 2023. For three periods 0.79
Principal amount 3,000,000
Direct origination cost incurred 260,300 Required:
Origination fee charged against the 100,000
borrower 1. Compute the impairment loss on the loan receivable.
2. Prepare journal entries for 2021, 2022, and 2023.
After considering the origination fee charged to the borrower
and the direct origination cost incurred, the effective rate on PROBLEM 7-6
the loan is 6%. Cozy Bank loaned a borrower P7,500,000 on January 1, 2021.
Required: The terms of the loan were payment in full on December 31,
2025, plus annual interest payment at 12% beginning
1. Prepare journal entries for 2021, 2022, and 2023 December 31, 2021.
The interest payment was made as scheduled on December Interest is payable annually every December 31 and the
31, 2021. However, due to financial setbacks, the borrower principal amount will be collected on December 31, 2026.
was unable to make the December 31, 2022 interest payment. Interest is collected for 2021.
The bank considered the loan impaired and projected the cash On December 31, 2021, the bank determined that the loan has
flows from the loan on December 31, 2022. The bank accrued a 12-month probability of default of 2% and expected to collect
the interest on December 31, 2022. only 90% of the loan.
Projected cash flows On December 31, 2022, the bank determined that there is a
Date of cash flow Amount projected on significant increase in the credit risk of the loan but no
December 31, 2022 objective evidence of impairment.
December 31, 2023 500,000
December 31, 2024 1,000,000 Based on relevant information, the bank concluded that there
December 31, 2025 2,000,000 is a 30% probability of default over the remaining term of the
December 31, 2026 4,000,000 loan and it is expected that only 60% of the loan will be
collected. Interest is collected for 2022.
Present value of 1 at 12% On December 31, 2023, the borrower was under financial
For one period 0.89 difficulty and the loan was considered impaired.
For two periods 0.80
For three periods 0.71 The bank agreed that only 40% of the principal will be
For four periods 0.64 collected on due date. Interest is collected for 2023.

Required: The present value of 1 at 9% is 0.65 for 5 periods, 0.71 for four
periods, and 0.77 for three periods.
1. Compute the present value of the loan receivable on
December 31, 2022. Required:
2. Compute the impairment loss on the loan receivable. 1. Prepare the journal entries for 2021, 2022, and 2023.
3. Prepare journal entries for 2022, 2023, and 2024. 2. Compute the carrying amount of the loan receivable
PROBLEM 7-7 on December 31, 2021, 2022 and 2023.
3. Prepare the journal entries for 2024, 2025 and 2026.
On December 31, 2021, Durable Bank has a loan receivable of
P4,000,000 from a borrower that it is carrying at face amount PROBLEM 7-9
and is due on December 31, 2026. Moderate Bank granted a loan to a borrower on January 1,
Interest on the loan is payable at 9% each December 31. 2021. The interest on the loan is 10% payable annually starting
December 31, 2021. The loan matures in three years on
The borrower paid the interest due on December 31, 2021 but December 31, 2023.
informed the bank that it would probably miss the next two
years’ interest payments because of financial difficulty. Principal amount 5,000,000
Direct origination cost incurred 100,000
After that, the borrower is expected to resume the annual Indirect origination cost incurred 50,000
interest payment but it would make the principal payment one Origination fee received from the borrower 340,000
year late, with interest paid for that additional year at the time
of principal payment. After considering the origination fee received from the
borrower and the direct origination cost incurred, the effective
Present value of 1 at 9% rate on the loan is 12%.
One period 0.917
Two periods 0.842 1. What is the carrying amount of the loan receivable on
Three periods 0.772 January 1, 2021?
Four periods 0.708
Five periods 0.65 A 4,760,000
Six periods 0.596 B 5,000,000
C 4,810,000
Required: D 4,660,000
2. What amount should be reported as interest income
1. Compute the present value of the loan receivable on for 2021?
December 31, 2021.
A 571,200
2. Compute the impairment loss to be recognized on
B 500,000
December 31, 2021.
C 476,000
3. Prepare the journal entries from 2021 to 2027. D 547,200
PROBLEM 7-8 3. What is the carrying amount of the loan receivable on
December 31, 2021?
On January 1, 2021, Global Bank loaned P3,000,000 to a
borrower. The contract specified that the loan had a 6-year A 5,000,000
term and a 9% interest rate. B 4,760,000
C 4,831,200
 D 4,910,944 However, during 2023 Caticlan Company began to experience
financial difficulties, requiring Kalibo Bank to reassess the
collectability of the loan.
On December 31, 2023, Kalibo Bank has determined that the
PROBLEM 7-10
remaining principal payment will be collected but the collection
National Bank granted a 10-year loan to Abbo Company in the of the interest is unlikely. Kalibo Bank did not accrue the
amount of P1,500,000 with a stated interest rate of 6%. interest on December 31, 2023.
Payments are due monthly and are computed to be P16,650.
The present value of 1 at 8%
National Bank incurred P40,000 of direct loan origination cost
For one period 0.93
and P20,000 of indirect loan origination cost. In addition,
For two periods 0.86
National Bank charged Abbo Company a 4-point For three periods 0.79
nonrefundable loan origination fee.
1. What is the initial carrying amount of the loan 1. What amount should be reported as loan impairment
receivable on the part of National Bank? loss for 2023?
A 1,440,000 A 410,000
B 1,480,000 B 210,000
C 1,500,000 C 220,000
D 1,520,000 D 0
2. What is the initial carrying amount of the loan payable 2. What amount should be reported as interest income
on the part of Abbo Company? for 2024?
A 1,440,000 A 207,200
B 1,480,000 B 143,200
C 1,500,000 C 240,000
D 1,520,000 D 0
3. What is the carrying amount of the loan receivable on
PROBLEM 7-11 December 31, 2024?
On December 1, 2021, Nicole Company gave Dawn Company A 2,000,000
a P2,000,000, 12% loan. Nicole Company paid proceeds of B 1,933,200
P1,940,000 after the deduction of a P60,000 nonrefundable C 1,590,000
loan origination fee. D 1,790,000
Principal and interest are due in sixty monthly installments of
P44,500, beginning January 1, 2022. The repayments yield an PROBLEM 7-12
effective interest rate of 12% at a present value of P2,000,000
World Bank loaned P9,000,000 to a borrower on January 1,
and 13.4% at a present value of P1,940,000.
2021. The terms of the loan were payment in full December
1. What amount of interest income should be reported in 31, 2025, plus annual interest payment at 12% beginning
2021? December 31, 2021.

A 22,333 The interest payment was made as scheduled on December

B 19,400 31, 2021. However, due to financial setbacks, the borrower
C 21,663 was unable to make the December 31, 2022 interest payment.
D 20,000
2. What amount should be reported as accrued interest The bank considered the loan impaired and projected the cash
receivable on December 31, 2021? flows from the loan on December 31, 2022. The bank has
accrued the interest on December 31, 2022.
A 44,500
B 60,000 Date of cash flow Amount projected on
C 20,000 December 31, 2022
D 0 December 31, 2023 1,500,000
December 31, 2024 2,000,000
December 31, 2025 2,500,000
PROBLEM 7-12 December 31, 2026 3,000,000
Kalibo Bank loaned P5,000,000 to Caticlan Company on The present value of 1 at 12% is 0.89 for one period, 0.80 for
January 1, 2021. The terms of the loan require principal two periods, 0.71 for three periods, and 0.64 for four periods.
payments of P1,000,000 each year for 5 years plus interest at 1. What amount should be reported as loan impairment
8%. loss for 2022?
The first principal and interest payment is due on January 1, A 2,370,000
2022. Caticlan Company made the required payments during B 3,450,000
2022 and 2023. C 6,630,000
 D 2,450,000 On December 31, 2023, the bank determined that the borrower
2. What amount should be reported as interest income would pay back only P3,000,000 of the principal at maturity.
for 2023?
However, it was considered likely that interest would continue
A 795,600 to be paid on the P5,000,000 loan.
B 900,000
C 180,000 The present value of 1 at 12% is 0.57 for five periods and 0.71
D 0 for three periods and 2.40 for three periods.
3. What is the carrying amount of the loan receivable on
1. What is the amount of cash paid to the borrower on
December 31, 2023?
December 31, 2021?
A 5,925,600
B 4,845,600 A 4,400,000
C 6,330,000 B 4,500,000
D 7,500,000 C 5,000,000
D 4,650,000
2. What is the carrying amount of the loan receivable on
PROBLEM 7-14
December 31, 2023?
On December 31, 2021, Oregon Bank recorded an investment
A 4,650,000
of P5,000,000 in a loan granted to a client.
B 4,790,000
The loan has a 10% effective interest rate payable annually C 4,772,960
every December 31. The principal is due in full at maturity on D 4,720,000
December 31, 2024. 3. What amount should be reported as impairment loss
on loan receivable for 2023?
Unfortunately, the borrower is experiencing significant financial
difficulty and will have difficult time in making full payment. A 2,000,000
B 1,442,960
The bank projected that the entire principal will be paid at C 1,922,960
maturity and 4% interest of P200,000 will be paid annually on D 1,670,000
December 31 of the next three years. There is no accrued
interest on December 31, 2021.
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 amount should be reported as impairment loss
for 2021?
A 752,000
B 600,000
C 250,000
D 748,000
2. What amount should be reported as interest income
for 2022?
A 200,000
B 424,800
C 224,800
D 500,000
3. What is the carrying amount of the loan receivable on
December 31, 2022?
A 5,000,000
B 3,750,000
C 4,472,800
D 4,672,800

PROBLEM 7-15
On December 31, 2021, 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.