Problem Solving - Loan Receivable

1 Nasty Bank

Principal amount 4,000,000

Direct origination cost 150,000
Origination fees received from the borrower (342,100)
Initial Carrying amount of Loan Receivable 3,807,900

2019
1/1/2019 To record the loan receivable

Loan receivable 4,000,000

Cash 4,000,000

To record the direct origination cost incurred by bank

Unearned interest income 150,000

Cash 150,000

To record the origination fee received from borrower

Cash 342,100
Unearned interest income 342,100

Interest Interest
received Income (12%) - Amortization Carrying
Date (10%) - SR ER (Discount) amount
1/1/2019 3,807,900
12/31/2019 400,000 456,948 56,948 3,864,848
12/31/2020 400,000 463,782 63,782 3,928,630
12/31/2021 400,000 471,370 71,370 4,000,000

To compute the interest received (Principal x stated rate x time)

To compute the interest income (Carryng amount (previous year) x effective rate x time)
To compute amortization (Interest income - Interest received)
To compute new carrying amount (Carrying amount (previous year) + Amortization (Discount)

12/31/2019 To record the collection of interest

Cash 400,000
Interest income 400,000

To record the amortization of discount

Unearned interest income 56,948

Interest income 56,948

12/31/2020 To record the collection of interest

Cash 400,000
Interest income 400,000

To record the amortization of discount

Unearned interest income 63,782

Interest income 63,782

12/31/2021 To record the collection of interest

Cash 400,000
Interest income 400,000

To record the amortization of discount

Unearned interest income 71,370

Interest income 71,370

To record the collection of principal

Cash 4,000,000
Loan receivable 4,000,000
2 Awesome Company

a. Principal amount 4,000,000

Direct origination cost 61,500
Origination fee received from borrower (350,000)
Initial carrying amount 3,711,500

Interest Interest
received Income (12%) - Amortization Carrying
b. Date (10%) - SR ER (Discount) amount
1/1/2019 3,711,500
12/31/2019 400,000 445,380 45,380 3,756,880
12/31/2020 400,000 450,826 50,826 3,807,706
12/31/2021 400,000 456,925 56,925 3,864,630
12/31/2022 400,000 463,756 63,756 3,928,386
12/31/2023 400,000 471,614 71,614 4,000,000

1/1/2019 To record the loan receivable

Loan receivable 4,000,000

Cash 4,000,000

To record the direct origination cost incurred by bank

Unearned interest income 61,500

Cash 61,500

To record the origination fee received from borrower

Cash 350,000
Unearned interest income 350,000

12/31/2019 To record the collection of interest

Cash 400,000
Interest income 400,000

To record the amortization of discount

Unearned interest income 45,380

Interest income 45,380

12/31/2020 To record the collection of interest

Cash 400,000
Interest income 400,000

To record the amortization of discount

Unearned interest income 50,826

Interest income 50,826

3 Pauper Bank

Principal 3,000,000
Direct origination cost 260,300
Origination fee received from the borrower (100,000)
Initial carrying amount of loan receivable 3,160,300

Interest Interest
received (8%) - Income (6%) - Amortization Carrying
Date SR ER (premium) amount
1/1/2019 3,160,300
12/31/2019 240,000 189,618 50,382 3,109,918
12/31/2020 240,000 186,595 53,405 3,056,513
12/31/2021 240,000 183,487 56,513 3,000,000

To determine the new carrying amount, if the loan is at premium:

New carrying amount = Carrying amount of prior year - amortization of premium
 1/1/2019 To record the loan receivable

Loan receivable 3,000,000

Cash 3,000,000

To record the direct origination cost

Direct origination cost 260,300

Cash 260,300

To record origination fee received from borrower

Cash 100,000
Direct origination cost 100,000

12/31/2019 To record the collection of interest

Cash 240,000
Interest income 240,000

To record the amortization of direct origination cost

Interest income 50,382

Direct origination cost 50,382

12/31/2020 To record the collection of interest

Cash 240,000
Interest income 240,000

To record the amortization of direct origination cost

Interest income 53,405

Direct origination cost 53,405

12/31/2020 To record the collection of interest

Cash 240,000
Interest income 240,000

To record the amortization of direct origination cost

Interest income 56,513

Direct origination cost 56,513

To record the collection of principal

Cash 3,000,000
Loan receivable 3,000,000

4
a. Principal 5,000,000
Direct origination cost 457,500
Origination fee received from borrower (200,000)
Initial carrying amount of loan receivable 5,257,500

Interest Interest
received Income (8%) - Amortization Carrying
b. Date (10%) - SR ER (premium) amount
1/1/2019 5,257,500
12/31/2019 500,000 420,600 79,400 5,178,100
12/31/2020 500,000 414,248 85,752 5,092,348
12/31/2021 500,000 407,652 92,348 5,000,000

c.
1/1/2019 To record the loan receivable

Loan receivable 5,000,000

Cash 5,000,000
To record the direct origination cost
Direct origination cost 457,500
Cash 457,500
 To record the origination fee received from borrower

Cash 200,000
Direct origination cost 200,000

12/31/2019 To record the collection of interest

Cash 500,000
Interest income 500,000

To record the amortization of direct origination cost

Interest income 79,400

Direct origination cost 79,400

12/31/2020 To record the collection of interest

Cash 500,000
Interest income 500,000

To record the amortization of direct origination cost

Interest income 85,752

Direct origination cost 85,752

12/31/2021 To record the collection of interest

Cash 500,000
Interest income 500,000

To record the amortization of direct origination cost

Interest income 92,348

Direct origination cost 92,348

To record the collection of principal

Cash 5,000,000
Loan receivable 5,000,000

5 Solvent Bank

Loan receivable, balance xxx

Add: Accrued interest receivable, (if any) xxx
Total Receivable xxx
Less: PV of cash flow (xxx)
Impairment loss xxx

Impairment loss = Total receivable > PV of cash flow

Total impairment loss xxx

Less: Accrued interest receivable, (if any) (xxx)
Allowance for impairment loss xxx

a. Loan receivable, balance (10,000,000 - 4,000,000) 6,000,000

Add: Accrued interest receivable (6,000,000 x 8% x 1 yr) 480,000
Total receivables 6,480,000
Less: PV of cash flow (5,020,000)
Impairment loss 1,460,000

Expected
principal Total PV of
Date payments PVF of 1 cash flow
12/31/2020 1,000,000 0.93 930,000
12/31/2021 2,000,000 0.86 1,720,000
12/31/2022 3,000,000 0.79 2,370,000
5,020,000

Total impairment loss 1,460,000

Less: Accrued interest receivable (480,000)
Allowance for impairment loss 980,000
 Interest Carrying
Date Collection income (8%) Principal amount / PV
12/31/2019 5,020,000
12/31/2020 1,000,000 401,600 598,400 4,421,600
12/31/2021 2,000,000 353,728 1,646,272 2,775,328
12/31/2022 3,000,000 224,672 2,775,328 -

or

12/31/2019

Principal 6,000,000
Less: Allowance for impairment loss (980,000)
Carrying amount of loan receivable 5,020,000

12/31/2020

Principal (6,000,000 - 1,000,000) 5,000,000

Less: Allowance for impairment loss (980,000 - 401,600) (578,400)
Carrying amount of loan receivable 4,421,600

Amortization of impairment loss (5,020,000 x 8% x 1yr) = 401,600

12/31/2021

Principal (5,000,000 - 2,000,000) 3,000,000

Less: Allowance for impairment loss (578,400 - 353,728) (224,672)
Carrying amount of loan receivable 2,775,328

Amortization of impairment loss (4,42,600 x 8% x 1yr) = 353,728

12/31/2022

Principal (3,000,000 - 3,000,000) -

Less: Allowance for impairment loss (224,672 - 224,672) -
Carrying amount of loan receivable -

Amortization of impairment loss (3,000,000 - 2775,328 ) =224,672

12/31/2019 To record the impairment loss

Impairment loss 1,460,000
Accrued interest receivable 480,000
Allowance for impairment loss 980,000

12/31/2020 To record the collection of principal

Cash 1,000,000
Loan receivable 1,000,000

To record the amotization of allowance for impairment loss

Allowance for impairment loss 401,600

Interest income 401,600

12/31/2021 To record the collection of principal

Cash 2,000,000
Loan receivable 2,000,000

To record the amotization of allowance for impairment loss

Allowance for impairment loss 353,728

Interest income 353,728

12/31/2022 To record the collection of principal

Cash 3,000,000
Loan receivable 3,000,000
 To record the amotization of allowance for impairment loss

Allowance for impairment loss 224,672

Interest income 224,672

6 Cozy Bank

(2) Loan receivable, balance 7,500,000

Add: Accrued interest (7,500,000 x 12% x 1yr) 900,000
Total receivables 8,400,000
Less: PV of cash flow 5,225,000
Impairment loss 3,175,000

Expected
principal Total PV of
(1) Date payments PVF of 1 cash flow
12/31/2020 500,000 0.89 445,000
12/31/2021 1,000,000 0.80 800,000
12/31/2022 2,000,000 0.71 1,420,000
12/31/2023 4,000,000 0.64 2,560,000
5,225,000

Total impairment loss 3,175,000

Less: Accrued interest receivable (900,000)
Allowance for Impairment loss 2,275,000

Interest Carrying
Date Collection income (12%) Principal amount / PV
12/31/2019 5,225,000
12/31/2020 500,000 627,000 (127,000) 5,352,000
12/31/2021 1,000,000 642,240 357,760 4,994,240
12/31/2022 2,000,000 599,309 1,400,691 3,593,549
12/31/2023 4,000,000 406,451 3,593,549 -

(3)
12/31/2019 To record the impairment loss

Impairment loss 3,175,000

Accrued interest receivable 900,000
Allowance for impairment loss 2,275,000

12/31/2020 To record the collection of principal

Cash 500,000
Loan receivable 500,000

To record the amortization of allowance for loan impairment

Allowance for impairment loss 627,000

Interest income 627,000

12/31/2021 To record the collection of principal

Cash 1,000,000
Loan receivable 1,000,000

To record the amortization of allowance for loan impairment

Allowance for impairment loss 642,240

Interest income 642,240