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UCPB SAVINGS BANK Operations Division

INTRODUCTION

This mini-lesson includes learning objectives, background information, discussion questions, an activity, and sources of additional information.

2

OBJECTIVES

Associates will learn:

• How loans bookkeeping flows. • What documents to require and items to look into prior to booking. • How to properly classify loans accordingly. • What are the acceptable mode of payments and hierarchy of payments. • How interest paid or received is calculated. • The difference between interest computation methods. • How to calculate penalties/charges. • How repaying a loan early saves you money. • The life-cycle of a loan with relation to bookkeeping.

**Overview of Bookkeeping Cycle
**

BOOKING Current

Past Due

Restructured

Items Under Litigation

Acquired Assets (ROPA)

Sales Contract Receivable

M AT U R I T Y o r PAY O F F

Basis of Booking

• Documents Required Prior to Booking

– – – – CRAM BIS Transaction Ticket PN with Disclosure Statement

**• Items for Checking
**

– Completeness & corrretness of details – Proper approvals

Type of Loans

• • • • • • COMMERCIAL LOANS AGRICULTURAL LOANS INDUSTRIAL LOANS REAL ESTATE LOANS SMALL BUSINESS LOANS CONSUMPTION LOANS – AUTO/TRUCK/FLEET) – SALARY LOANS – TPL/PSPL/PSND – CASH LOAN – PVAO • OTHER LOANS AND DISCOUNTS

Other Loans

• Back-to-back/one-to-one/hold-out-on deposit • Bills Purchased • Financial Assistance Program (FAP - for employees) • Letters of Credit – domestic/foreign

Type of Loans

• AGRICULTURAL LOANS - This represents loans to finance agricultural production and related activities, purchase of farm machinery, equipment and implements work/breeding animals, including but not limited to the establishment and operation of poultry, piggery, livestock and fishery projects.

• INDUSTRIAL LOANS - This represents loans to finance the production, processing transformation, handling and/or transportation of industrial products and /or conservation, enlargement, or improvement of productive properties, or the acquisition of machinery or other fixed installation.

• COMMERCIAL LOANS - This represents loans to finance the purchase of products or merchandise for resale.

Type of Loans

• REAL ESTATE LOANS This represents loans to finance and/or refinance the construction, acquisition, expansion, or improvement or rural/ urban properties. • CONSUMPTION LOANS This represents loans for personal and household finance, such as care, household appliances, furniture sans fixtures and/ or to pay taxes, hospital and education bills.

• OTHER LOANS DISCOUNTS This account represents loans granted for purposes other than agricultural, commercial, industrial, real estate or consumption.

Type of Loans

ABOVE LOAN ACCOUNTS ARE

– DEBITED FOR:

**• new loans granted • any debits than new loans granted should be properly described.
**

– CREDITED FOR:

**payments received applied to principal • reclassification to past due or items in litigation.
**

In case of renewal, debit the new loan and credit the old loan.

Classification of loans

• CURRENT LOANS AND DISCOUNTS This represents all loans with updated accounts. PAST DUE LOANS AND DISCOUNTS Past Due accounts are being classified as follows: BSP Policy Monthly installment – 3 Quarterly payment – 1 Semi - Annually – 1 Annually – 1 ACCOUNT IS DEBITED FOR: a. transfer from current to Past Due ACCOUNT IS CREDITED FOR: transfer from past due to Items in Litigation payments received applied to principal write off (direct off or against valuation reserve) renewals/restructurings •

Classification of loans

• RESTRUCTURED LOANS

This represents loans that were past due and whose terms and conditions of grant have been modified in accordance with a restructured agreement. The modification of terms may include, but is not limited to an extension of maturity or a change in interest rate, collateral or in the face accumulated charges. Provided, that Accrued Interest and accumulated charges on restructured are credited to “ Interest Earned not yet collected” and treated as a deferred credit pending collection.

**ACCOUNT IS DEBIIED FOR:
**

a. the outstanding principal balance plus accrued interest and accumulated charges when the past due loans are restructured. ACCOUNT IS CREDITED FOR: a. receipt of payment (only after deferred credit has been fully paid/reversed).

Classification of loans

• ITEMS IN LITIGATION This represents all loans and advances refereed to the bank’s lawyer or sheriff for collection/foreclosure court action as the case maybe. The loan or advance shall remain in this account during the tendency of the legal proceedings until it is fully paid or the property is foreclosed. ACCOUNT IS DEBITED FOR: a. transfer from Past due to Items in Litigation ACCOUNT IS CREDITED FOR: a. payments received applied to principal b. writes offs c. renewal/restructurings d. foreclosure of property/collateral mortgaged

Loan Tenor

• Term Factor/ Denominator

360 days – term of loan is 360 days or less 365 days – term of loan is more than 360 days

• Term of Loan

Short term - one year or less Medium Term – more than 1 year to 5 years Long Term – more than 5 years

Mode of Payments

• INSTALLMENTS

– – – – MONTHLY QUATERLY SEMI-ANNUALLY ANNUALLY

• BALLOON • DISCOUNTED/INTEREST COLLECTED IN ADVANCE • COMBINATION OF 1 & 2 • COMBINATION OF 1 & 3 • COMBINATION OF 2 & 3

Hierarchy of Payments

» ACCOUNTS RECEIVABLE » ACCRUED INTEREST RECEIVABLE » SERVICE CHARGES » PENALTIES » INTEREST » PRINCIPAL

Laws on Rates

Laws have been passed to minimize some of the confusion consumers face when they borrow or lend money. The Truth in Lending Act, RA 3765, has made it easier for consumers to compare rates when they borrow money. Similarly, the purpose of the Disclosure of Effective Rate of Interest on Savings Deposit, BSP Cir. No. 533, is to assist consumers in comparing the rates on savings accounts offered by depository institutions.

INTEREST CALCULATIONS

Interest represents the price borrowers pay to lenders for credit over specified periods of time. The amount of interest paid depends on a number of factors: the amount lent or borrowed, the length of time involved in the transaction, the stated (or nominal) annual rate of interest, the repayment schedule, and the method used to calculate interest (Interest Rate is quoted on an annual basis unless other term is specified ).

**INTEREST CALCULATIONS • Diminishing Balance*
**

FORMULA

Interest Monthly =

Principal x Interest Rate x Number of Days 360 or 365 Loan Amount 1 - Interest Rate Term Total 12 . Interest Rate 12 Loan Amount 12 _ Interest Rate

Amortization Monthly =

OR

Amortization Monthly =

12 x Interest Rate Term Total Interest Rate 12

**AMORTIZATION SCHEDULE BASED ON DIMINISHING METHOD
**

I.C.D.P & CO., INC. PINCIPAL: 50,000.00 INTEREST RATE: 30.00% VALUE DATE: 18-NOV-93 PN NO: 900100000 TERM: 181 DAYS

REPAYMENT: Monthly payment of principal & interest in the amount of P 9,078.00 every 23 rd of the month to start on Dec. 18, 1993. --------------------------------------------------------------------------------------------------------------Date of Total Outstanding Payment Payment Interest Principal Balance ---------------------------------------------------------------------------------------------------------------50,000.00 18-Dec-93 18-Jan-94 18-Feb-94 18-Mar-94 18-Apr-94 18-May-94 9,078.00 9,078.00 1,250.00 1,089.44 7,828.00 7.988.56 42,172.00 34,183.44

9,078.00 883.07 8,194.93 25,988.52 9,078.00 606.40 8,471.60 17,516.91 9,078.00 452.52 8,625.48 8,891.43 9,113.72 222.29 8,891.43 0.00 ---------------------------------------------------------54,503.72 4,503.72 50,000.00 ==================================

INTEREST CALCULATIONS

• Straight Line

Interest Total = Loan Amount x Interest Rate x 100 Interest Monthly = Interest Total Term Total Term Total 12

Amortization Monthly = Loan Amount + Interest Total Term Total Principal Monthly = Amortization Monthly – Interest Total

**AMORTIZATION SCHEDULE BASED ON STRAIGHT LINE METHOD
**

I.C.D.P & CO., INC. PINCIPAL: 50,000.00 INTEREST RATE: 30.00% VALUE DATE: 18-NOV-93 PN NO: 900100000 TERM: 181 DAYS

REPAYMENT: Interest collected in advance, principal to be paid upon maturity ---------------------------------------------------------------------------------------------Amortization Date Total Payment Unearned Interest Discount Amortization of Interest Principal Payment Outstanding Balance

---------------------------------------------------------------------------------------------30-Nov-93 0.00 31-Dec- 93 0.00 31- Jan- 94 0.00 28-Feb- 94 0.00 31-Mar-94 0.00 30-Apr-94 0.00 18-May-94 50,000.00

7,541.67 0.00 0.00 0.00 0.00 0.00 0.00 0.00

7,541.67 0.00 500.00 0.00 1,291.67 0.00 1,291.67 0.00 1,166.67 0.00 1,291.67 0.00 1,250.00 0.00 750.00 50,000.00

50,000.00 50,000.00 50,000.00 50,000.00 50,000.00 50,000.00 50,000.00 0.00

------------------------------------------------------------54,541.67 7,541.67 7, 541.67 50,000.00 =====================================

INTEREST CALCULATIONS

• Rule of 78

Interest Total = Loam Amount x Interest Rate 100

x Term Total

x

Term Total 12

SYD =

Term Total + 1 2

Interest Monthly =

Interest Total x Term Remaining ----------------------------------SYD

Amortization Monthly = Loan Amount x Interest Rate /100 Term Total Principal Monthly = Amortization Monthly – Interest Monthly

**AMORTIZATION SCHEDULE BASED ON RULE OF 78
**

I.C.D.P & CO., INC. PrINCIPAL: 100,000.00 INTEREST RATE : 20.00% VALUE DATE: Nov. 18, 1993 REPAYMENT: No. of Payment 1 2 3 4 5 6 7 8 9 10 11 12 78

PN NO : 510100000 TERM : 12 MONTHS

Monthly installment of P10,000.00 every 23rd of the month to start on Dec. 18, 1993. Total Payment 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 10,000.00 120,000.00 Outstanding Balance 100,000.00 93,076.92 85,897.44 78,461.54 70,769.23 62,820.51 54,615.38 46,153.85 37,435.90 28,461.54 19,230.77 9,743.59 -

Interest 3,076.92 2,820.51 2,564.10 2,307.69 2,051.28 1,794.87 1,538.46 1,282.05 1,025.64 769.23 512.82 256.41 20,000.00

Principal 6,923.08 7,179.49 7,435.90 7,692.31 7,948.72 8,205.13 8,461.54 8,717.95 8,974.36 9,230.77 9,487.18 9,743.59 100,000.00

INTEREST CALCULATIONS

• Effective Interest

Interest Monthly = Principal x Interest Rate Term Total Amortization Monthly = Loan Amount 1 - Interest Rate Term Total 12 OR . Interest Rate/12 Amortization Monthly = Loan Amount . 12 / Interest Rate - ( 12 x Interest Rate Term Total) Interest Rate 12 Principal Monthly = Amortization Monthly – Interest Monthly

EFFECTIVE INTEREST RATE METHOD Diminishing Balance – actual no. of days , used in REL Example: AF Rate Term

= = =

100K 12% 12 months

Value Date = Frequency = First Due Date =

1/1/93 quarterly Feb. 1

0/S Bal. * Rate* no. of days 365 Computed Quarterly: Principal Interest Q1 25,000 2,958.90 100,000 Q2 25,000 2,243.84 75,000 Q2 25,000 1,512.33 50,000 Q3 25,000 756.16 25,000 -------------------7,471.23 Computed Monthly: Principal Interest O/S Balance M1 8,333.33 1,019.18 100,000.00 M2 8,333.33 843.84 91,666.57 M3 8,333.33 743.79 75,000.01 M4 8,333.33 679.45 66,666.68 M5 8,333.33 575.34 58,333.35 M6 8,333.33 509.59 50,000.02 M7 8,333.33 410.96 41,666.69 M8 8,333.33 849.32 83,333.34 M9 8,333.33 339.73 33,333.36 M10 8,333.33 246.58 25,000.03 M11 8,333.33 169.86 16,666.70 M12 8,333.37 82.19 8,333.37 ---------0.00 6,465.77

O/S Bal. 21% 21% 21% 21% 142

Int. R 12 24 36 48 120

Terms Factor .093113774 .051385651 .037675067 .030965695 .015526643

Penalty Computation

P = UA x PR x T / 30

Where: P UA PR T = = = = Penalty Unpaid Amortization Penalty Rate Time (No. of Days from last payment date or due Date whichever is later)

**Sample Computation of Penalty
**

Given: Principal : P100,000.00 MC prepared for proceeds of P100,000.00 Value Date: Nov. 18, 1993 First due date: Dec. 18, 1993 Cash Payments made as follows: Dec. 18, 1993 10,000.00 April 1, 1994 20,000.00 May 15, 1994 20,000.00 May 19, 1994 ? full payment Expenses incurred: April 30, 1994 5,000.00 Litigation Expenses May 16, 1994 7,500.00 Insurance premiums advanced by the bank Account was endorsed to legal on April 15, 1994 Penalty rate 5% per month Refer to Rule of 78 Amortization schedule Instructions: Prepare necessary accounting entries & show computation of penalties & amount to prepay.

SIMPLE INTEREST

The various methods used to calculate interest are basically variations of the simple interest calculation method. The basic concept underlying simple interest is that interest is paid only on the original amount borrowed for the length of time the borrower has use of the credit. The amount borrowed is referred to as the principal. In the simple interest calculation, interest is computed only on that portion of the original principal still owed.

**OTHER CALCULATION METHODS
**

Add-on interest, bank discount, and compound interest calculation methods differ from the simple interest method as to when, how, and on what balance interest is paid. The "effective annual rate" for these methods is that annual rate of interest which, when used in the simple interest rate formula, equals the amount of interest payable in these other calculation methods. For the declining balance method, the effective annual rate of interest is the stated or nominal annual rate of interest. For the methods described below, the effective annual rate of interest differs from the nominal rate.

Add-On Interest

When the add-on interest method is used, interest is calculated on the full amount of the original principal. The interest amount is immediately added to the original principal, and payments are determined by dividing principal plus interest by the number of payments to be made. When only one payment is involved, this method produces the same effective interest rate as the simple interest method. When two or more payments are to be made, the effective rate of interest is greater than the nominal rate.

More Facts

The interest amount is calculated by applying the nominal rate to the total amount borrowed, but the borrower does not have use of the total amount for the entire time period if two or more payments are made. Using the add-on interest method, interest of P50 (5% of P1,000 for one year) is added to the P1,000 borrowed, giving P1,050 to be repaid; half (or P525) at the end of 6 months and the other half at the end of the year.

More Facts

A one-year, two equal-payment, 5% add-on rate loan is equivalent to a one-year, two equal-payment, 6.631% declining balance loan, consider the following. When the first P525 payment is made, P33.15 in interest is due (6.631% of P1,000 for onehalf year). Deducting the P33.15 from P525 leaves P491.85 to be applied to the outstanding balance of P1,000, leaving the borrower with P508.15 to use during the second half-year. The second P525 payment covers P16.85 in interest (6.631% of P508.15 for one-half year) and the P508.15 balance due.

More Facts

In this particular example, using the add-on interest method means that no matter how many payments are to be made, the interest will always be P50. As the number of payments increases, the borrower has use of less and less credit over the year. For example, if four quarterly payments of P262.50 are made, the borrower has the use of P1,000 during the first quarter, around P750 during the second quarter, around P500 during the third quarter, and around P250 during the fourth and final quarter.

More Facts

.

Therefore, as the number of payments increases, the effective rate of interest also increases. For instance, in the current example, if four quarterly payments are made, the effective rate of interest would be 7.922%; if 12 monthly payments are made, the effective interest rate would be 9.105%. The add-on interest method is sometimes used by finance companies and some banks in determining interest on consumer loans.

Bank Discount

When the bank discount calculation method is used, interest is calculated on the amount to be paid back and the borrower receives the difference between the amount to be paid back and the interest amount. The bank discount method is also referred to as the discount basis.

Example 5

Consider the loan in Example 1 where a 5%, P1,000 loan is to be repaid at the end of one year. If the bank discount method is used, the interest amount of P50 would be deducted from the P1,000, leaving the borrower with P950 to use over the year. At the end of the year, the borrower pays P1,000. The interest amount of P50 is the same as in Example 1.

More Facts

The borrower in Example 1, however, had the use of P1,000 over the year. Thus, the effective rate of interest in Example 5 would be 5.263% (P50 divided by P950) compared to an effective rate of 5% in Example 1. Borrowing that use the bank discount method often have no intermediate payments. For example, the bank discount method is used for Treasury bills sold by the Government and commercial paper issued by businesses. In addition, bonds are sold on a discount basis, i.e., at a price below their face value.

**How Many Days in a Year?
**

In the above examples, a year was assumed to be 365 days long. Historically, in order to simplify interest calculations, lenders and borrowers often assumed that each year had twelve 30-day months, resulting in a 360-day year. For any given nominal rate of interest, the effective rate of interest will be greater when a 360-day year is used in the interest calculation than when a 365day year is used.

Example 6

Suppose that a P1,000 loan is discounted at 5% and payable in 365 days. This is the situation in Example 5 where, based on a 365-day year, the effective rate of interest was 5.263%. If the bank discount calculation assumes a 360-day year, then the length of time is computed to be 365/360 instead of exactly one year; the interest deducted (the discount) equals P50.69 instead of P50; and the effective annual rate of interest is 5.34%.

COMPOUND INTEREST

When the compound interest calculation is used, interest is calculated on the original principal plus all interest accrued to that point in time. Since interest is paid on interest as well as on the amount borrowed, the effective interest rate is greater than the nominal interest rate. The compound interest rate method is often used by banks and savings institutions in determining interest they pay on savings deposits "loaned" to the institutions by the depositors.

Example 7

Suppose P1,000 is deposited in a bank that pays a 5% nominal annual rate of interest, compounded semiannually (twice a year). At the end of the first half-year, P25 in interest (5 percent of P1,000 for one-half year) is payable. At the end of the year, the interest amount is calculated on the P1,000 plus the P25 in interest already paid, so that the second interest payment is P25.63 (5% of P1,025 for onehalf year). The interest amount payable for the year, then, is P25 plus P25.63, or P50.63. The effective rate of interest is 5.063 percent, which is greater than the nominal 5% rate.

More Facts

The more often interest is compounded within a particular time period, the greater will be the effective rate of interest. In a year, a 5% nominal annual rate of interest compounded four times (quarterly) results in an effective annual rate of 5.0945%; compounded 12 times (monthly), 5.1162%; and compounded 365 times (daily), 5.1267%. The effective rate of interest is disclosed as the Effective Yield (EY).

**WHEN REPAYMENT IS EARLY
**

In the above examples, it was assumed that periodic loan payments were always made exactly when due. Often, however, a loan may be completely repaid before it is due. When the declining balance method for calculating interest is used, the borrower is not penalized for prepayment since interest is paid only on the balance outstanding for the length of time that amount is owed. When the add-on interest calculation is used, however, prepayment implies that the lender obtains some interest that is unearned.

Rule of 78s

Some loan contracts make provisions for an interest rebate if the loan is prepaid. One method used in determining the amount of the interest rebate is referred to as the "Rule of 78s". Application of the Rule of 78s yields the percentage of the total interest amount that is to be returned to the borrower in the event of prepayment. The percentage figure is arrived at by dividing the sum of the integer numbers (digits) from one to the number of payments remaining by the sum of the digits from one to the total number of payments specified in the original loan contract.

More Facts

The more often interest is compounded within a particular time period, the greater will be the effective rate of interest. In a year, a 5% nominal annual rate of interest compounded four times (quarterly) results in an effective annual rate of 5.0945%; compounded 12 times (monthly), 5.1162%; and compounded 365 times (daily), 5.1267%. The effective rate of interest is disclosed as the Effective Yield (EY).

More Facts

Application of the Rule of 78s results in the borrowers paying somewhat more interest than would have been paid with a comparable declining balance loan. How much more depends on the total number of payments specified in the original loan contract and the effective rate of interest charged. The greater the specified total number of payments and the higher the effective rate of interest charged, the more the amount of interest figured under the Rule of 78s exceeds that under the declining balance method.

More Facts

The difference between the Rule of 78s interest and the declining balance interest also varies depending upon when the prepayment occurs. This difference over the term of the loan tends to increase up to about the 1/3 point of the term and then decrease after this point. For example, with a 12-month term, the difference with prepayment occurring in the second month would be greater than the difference that would occur with prepayment in the first month; the third-month difference would be greater than the second-month difference; etc. After the fifth month, each succeeding month's difference would be less than the previous month's difference.

Example 8

Suppose that there are two P1,000 loans that are to be repaid over 12 months. Interest on the first loan is calculated using a 5% add-on method, which results in equal payments ofP87.50 due at the end of each month (P1,000 plus P50 interest divided by 12 months). The effective annual rate of interest for this loan is 9.105%. Any interest rebate due because of prepayment is to be determined by the Rule of 78s.

Example 8

Interest on the second loan is calculated using a declining balance method where the annual rate of interest is the effective annual rate of interest from the first loan, or 9.105%. Equal payments of P87.50 are also due at the end of each month for the second loan. Suppose that repayment on both loans occurs after one-sixth of the term of the loan has passed, i.e., at the end of the second month, with the regular first month's payment being made for both loans.

Example 8

The interest paid on the first loan will be P14.74, while the interest paid on the second loan will be P14.57, a difference of 17 centavos. If the prepayment occurs at the end of the fourth month (regular payments having been made), interest of P26.92 is paid on the first loan and interest of P26.69 on the second loan, a difference of 23 centavos. If the prepayment occurs later at the end of the ninth month (regular payments having been made), P46.16 in interest is paid on the first loan and P46.07 in interest is paid on the second loan, a difference of but 9 cents.

**CHARGES OTHER THAN INTEREST
**

In addition to the interest that must be paid, loan agreements often will include other provisions which must be satisfied. Two examples of these provisions are mortgage points and required (compensating) deposit balances.

Mortgage Points

Mortgage lenders will sometimes require the borrower to pay a charge in addition to the interest. This extra charge is calculated as a percentage of the mortgage amount and is referred to as mortgage points. For example, if 2 points are charged on a P100,000 mortgage, then 2 percent of P100,000, or P2,000, must be paid in addition to the stated interest.

More Facts

The borrower, therefore, is paying a higher price than if points were not chargedi.e., the effective rate of interest is increased. In order to determine what the effective rate of interest is when points are charged, it is necessary to deduct the peso amount resulting from the point calculation from the mortgage amount and add it to the interest amount to be paid. The borrower is viewed as having use of the mortgage amount less the point charge amount rather than the entire mortgage amount.

Example 9

Suppose that 2 points are charged on a 20-year, P100,000 mortgage where the rate of interest (declining balance calculation) is 7%. The payments are to be P775.30 per month. Once the borrower pays the P2,000 point charge, there is P98,000 to use. With payments of P775.30 a month over 20 years, the result of the 2-point charge is an effective rate of 7.262%.

Example 9

The longer the time period of the mortgage, the lower will be the effective rate of interest when points are charged because the point charge is spread out over more payments. In the above example, if the mortgage had been for 30 years instead of 20 years, the effective rate of interest would have been 7.201%.

**Required Deposit Balances
**

A bank may require that a borrower maintain a certain percentage of the loan amount on deposit as a condition for obtaining the loan. The borrower, then, does not have the use of the entire loan amount but rather the use of the loan amount less the amount that must be kept on deposit. The effective rate of interest is greater than it would be if no compensating deposit balance were required.

Example 10

Suppose that P1,000 is borrowed at 5% from a bank to be paid back at the end of one year. Suppose, further, that the lending bank requires that 10% of the loan amount be kept on deposit. The borrower, therefore, has the use of only P900 (P1,000 less 10%) on which an interest amount of P50 (5% of P1,000 for one year) is charged. The effective rate of interest is, therefore, 5.556% as opposed to 5% when no compensating balance is required.

SUMMARY

Although not an exhaustive list, the methods of calculating interest described here are some of the more common methods in use. They indicate that the method of interest calculation can substantially affect the amount of interest paid, and that savers and borrowers should be aware not only of nominal interest rates but also of how nominal rates are used in calculating total interest charges. Always look to the EY that is to be disclosed for the actual effective interest rate.

**REAL & OTHER PROPERTIES ACQUIRED
**

This account includes real and other properties, other than those used for banking purposes or held in the investment portfolio, acquired by the bank judicially or extra judicially in settlement of loans and/or for other reasons. The property acquired in settlement of loan shall be recorded at the balance of the loan if bid price is higher. Or if bid price is lower, it shall be recorded at the balance of the loan and the difference shall be recorded against allowance for probable loss on real and other properties, However, the property acquired for other reasons shall be recorded at cost/appraised value, whichever is applicable at the time of acquisition. All expenses incurred in the preservation/maintenance thereof shall charged to Litigation/Assets Acquired Expenses account, while all income realized thereof shall be credited to assets Acquired Account. The corresponding memorandum entries shall be made in the individual ledger account for these items .

**Accounting for ROPA
**

Given: Bid Price 100,000.00 Outstanding Principal Balance 71,311.30 Booked Receivables: Litigation Expenses 5,000.00 Insurance 7,500.00 12, 500.00 Instructions: Prepare necessary accounting entries & compute the book value of acquired asset. Book Value: Outstanding Principal Balance 71, 311.38 Book Receivables 12, 500.00 Book Value 83, 811.38 Accounting Entries: Real & Other Properties Owned or Acquired (ROPOA) 83,811.38 IUL AR-Litigation Expenses AR – Insurance

71,311.38 5,000.00 7,500.00

**Acctg for ROPA - Continuation
**

Given: Bid Price 50,000.00 Outstanding Principal Balance 71,311.38 Booked Receivables: Litigation Expenses 5,000.00 Insurance 7,500.00 12,500.00 Instruction: Prepare necessary accounting entries & compute the book value of acquired asset. Book Value: Outstanding Principal Balance 71,311.38 Booked Receivables 12,500.00 Book Value 83,811.38 Accounting Entries: Real & Other Properties Owned or Acquired (ROPOA) 83,811.38 IUL 71,311.38 AR-Litigation Expenses 5,000.00 AR-Insurance 7,000.00 Allowance for Probable Losses – Loans Allowance for Probable Losses – ROPOA Re: Set-up loss reserve for ROPOA. 33,811.38 33,811.38

**SALES CONTRACT RECEIVABLE
**

This represents the balance of the selling price of the assets owned and/or acquired, sold on installing basis under a duly executed Agreement to sell, title to which is still in the name of the Bank. Installment sales method shall be used wherein each collection consist partly of recovery of cost and partly recovery of gross profit. The profit recognized in the cash collections is based on the percentage of total profit of total sales price.

**Accounting for SCR
**

Given: Book Value Agreed Selling Price Down payment (paid in Cash) Balance payable in 10 months First Payment (paid in cash) 83,811.38 120,000.00 20,000.00 10,000.00

Instructions: Prepare necessary accounting entries & compute for the SCR, unrealized profit percentage. SCR: Agreed Selling Price 120,000.00 Less: down payment 20,000.00 SCR 100,000.00 Unrealized Profit: Agreed Selling Price Less: Book Value Unrealized Profit Profit Percentage: Total Profit / Total Sales Price 36,188.62 / 120,000.00 120,000.00 83,000.00 36,188.62

30.16%

**Accounting for SCR – Cont.
**

Accounting Entries: Cash 20,000.00 SCR 100,000.00 ROPOA Income from SCR Unrealized Profit Re: Booking SCR *** recognized because of cash collection of down payment Cash SCR Re: First Payment 10,000.00 10,000.00

83,000.38 6,031.44*** 30,157.18

Unrealized Profit 3,015.72 Income from SCR Re: Amount earned relative to payment received – 30.16% of

3,015.72 P10, 000.00

**Accounting for SCR – Cont.
**

Schedule of SCR & Unrealized Profit No. of SCR Balance Unrealized Balance of Payments of SCR Profit Profit ------------------------------------------------------------------------------------------------------------------------------------------------100,000.00 30,157.18 1 10,000.00 90,000.00 3,015.72 27,141.47 2 10,000.00 80,000.00 3,015.72 24,125.75 3 10,000.00 70,000.00 3,015.72 21,110.03 4 10,000.00 60,000.00 3,015.72 18,094.31 5 10,000.00 50,000.00 3,015.72 15,078.59 6 10,000.00 40,000.00 3,015.72 12,062.87 7 10,000.00 30,000.00 3,015.72 9,047.15 8 10,000.00 20,000.00 3,015.72 6,031.44 9 10,000.00 10,000.00 3,015.72 3,015.72 10 10,000.00 0.00 3,015.72 (0.00) 100,000.00 30,157.18 ======== ========

**WRITING OFF LOAN EXPOSURE
**

Loan Exposure shall include all receivables related to loans granted booked in the balance sheet (i.e. loans granted accrued interest receivables and any advances made such as for appraisal, insurance premiums or taxes). 1.All write offs on loan exposure shall require approval of the Board of Directors. 2.It shall be the responsibility of the Loan Officers/Division Head of the lending unit to recommend approval of request for loan write off to the Board of Directors. 3.Loans and advances to directors, officers, stockholders, and their related interests, whether direct or indirect should have prior approval of the Board of Directors. 4.A “Request for Loan Write-off shall contain the following: •details of the loan exposure and security held •brief history of relationship along with how and why account turned past due •summary of collection efforts made since account went past due, highlighting, among others, the major alternatives to recovery that were pursued but failed •reason for recommending write-off •details of action program and a timetable for proposed collection strategies 1.The Division Head shall present the Request to the Audit Department for review. 2.Once reviewed, the Division Head shall present the request to the Board of Directors for final approval. 3.After final approval of the Board of Directors of Loan exposure is less than P100,000 we send notice to CB and 30 days after receipt of CB account can be written off. For DOSRI and those with more P100,000 loan exposure, we have to wait for the CB approval prior to write off.

**WRITING OFF LOAN EXPOSURE Applicable Situations
**

1.Writing off loan accounts shall be applied to the following situations: •Where further collection efforts will no longer yield and meaningful recoveries. •Loans secured by hard assets but where the value of said assets when foreclosed is less than the total loan exposure. That portion of the loan not covered by the bid price on the asset may have to be written off if no other source of payment can be identified. •Where all possible alternatives to resolving an unsecured loan account have failed or where even winning the court case against client yields no recovery due to the absence of any meaningful assets to garnish. Collections on Written-off Accounts 1.On certain accounts where some recovery can still be made by continuing to exert pressure on the client, said accounts shall be handled in the same way as the remedial management of other past-due accounts not yet written-off. 2.We leave a P1.00 nominal value when writing off. This is for collection monitoring.

Valuation Reserves

Loan Loss reserve refers to allocations provided for portions of loans granted are deemed uncollectible. Loan loss reserves are determined by external auditors such as Central Bank SGV auditors. Loan loss Reserves shall be set up once every month in accordance with the following classifications: Per CB Policy;

Classified 0% Unclassified 0% Substandard 25% Doubtful 50% Loss 100% Per Banks Policy: Percentage of Loan Portfolio Auto loan 1 % of gross Other Loans 3 % of gross The amount of loan loss reserves shall not be constructed as an equivalent reduction of the borrower’s obligation to the bank. Collection efforts on said reserves should still be actively pursued. Borrowers should not be informed on the reserve provided for his account.

DISCUSSION QUESTIONS

1. How does the method of repayment effect the annual percentage rate of interest?

2. Does compounding of interest effect the annual yield of a savings account. Explain. 3. What two federal laws have been passed to minimize some of the confusion consumers face when they borrow or lend money?

4. What is the Rule of 78s?

ACTIVITY

1. Give associates some other examples to compute interest for different periods, payment terms, and loan amounts. 2. Have associates figure the amount of money they would have in a year if they saved P100.00 a month at an interest rate of 3% and the interest is compounded quarterly. 3. Have associate compute a Rule of 78s refund for a loan of P5,000 with 36 payments of P188.38 paid out after 12 payments.

Fundamentals of Bookeeping

Fundamentals of Bookeeping

- Fomc 19821116 Meeting
- Acct Bookeeping Ix
- Real Estate Ch 4 Slution (14 Edn)
- Entry-Level Accounting/Bookeeping
- nycirc_1988_10221.pdf
- TOPIC 6_bookeeping Procedures
- 15032_1955-1959
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- Appraisal Note - APMC YEOLA
- CBC Bookkeeping NC III
- treasury_hamp_report_2014_2.pdf
- Answer for Irene's Coin Laundry
- Session 9,10,11,12 - Addition
- Mastering Book-Keeping
- frb_021957
- The Trial Balance of Irene
- 8742_1970-1974
- CIVIL SERVICE REVIEWER 2015.docx
- Texas Mortgage Rates
- Hire Purchase
- 30235_1945-1949
- Rachel Weber, Selling City Futures, The Financialization of Urban Redevelopment Policy, Economic Geography, 2010
- nycirc_1990_10411.pdf
- fhlbr_193712
- DownloadServlet
- Mortgage
- 64093_1955-1959
- LecI
- Loan Servicing or Loan Processing or Default Management
- Types of loans

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