CHAPTER 7 LOANS RECEIVABLE Problem 7-4 PDF

Preview

Summary

PROBLEM 7-On January 1, 2020, Empress Bank granted a loan to a borrower. The interest on the loan is 10% payable annually on December 31,2020. The loan matures in three years on December 31,2022.Principal amount 5,000,Direct origination cost 457,Origination fee charged against the borrower 200,After...

Description

PROBLEM 7-4 On January 1, 2020, Empress Bank granted a loan to a borrower. The interest on the loan is 10% payable annually on December 31,2020. The loan matures in three years on December 31,2022. Principal amount Direct origination cost incurred Origination fee charged against the borrower

5,000,000 457,500 200,000

After considering the origination fee charged against the borrower and the direct origination cost incurred, the effective rate on the loan is 8%. Required: 1. Determine the carrying amount of the loan on January 1, 2020. 2. Prepare a table of amortization of the direct origination cost. 3. Prepare journal entries for 2020, 2021 and 2022.

Answer: Requirement 1 Principal amount Direct origination cost incurred Origination fee charged against the borrower Carrying amount - Jan. 1, 2020

5,000,000 457,500 -200,000 5,257,500

Requirement 2 Date

10% Interest received

8% Interest income

1-Jan-20 31-Dec-20 31-Dec-21 31-Dec-22

500,000 500,000 500,000

420,600 414,248 407,652

Requirement 3 Amortization

Carrying amount

79,400 85,752 92,348

5,257,500 5,178,100 5,092,348 5,000,000

2020 1-Jan

31-Dec

2021 31-Dec

2022 31-Dec

Loan receivable Cash

5,000,000 5,000,000

Direct origination cost Cash

457,500

Cash Direct origination cost

200,000

Cash Interest income

500,000

Interest income Direct origination cost

Cash Interest income Interest income Direct origination cost

Cash Interest income Interest income Direct origination cost Cash Loan receivable

457,500

200,000

500,000 79,400 79,400

500,000 500,000 85,752 85,752

500,000 500,000 92,348 92,348 5,000,000 5,000,000...