CHAPTER 7 LOANS RECEIVABLE Problem 7-5 PDF

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PROBLEM 7-Solvent Bank loaned P10,000,000 to a borrower on January 1,2018. The terms of the loan require principal payments of P2,000,000 each year for 5 years plus interest at 8%. The first principal and interest payment is due on December 31, 2018. The borrower made the required payments on Decemb...

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PROBLEM 7-5 Solvent Bank loaned P10,000,000 to a borrower on January 1,2018. The terms of the loan require principal payments of P2,000,000 each year for 5 years plus interest at 8%. The first principal and interest payment is due on December 31, 2018. The borrower made the required payments on December 31, 2018 and December 31, 2019. However, during 2020 the borrower began to experience financial difficulties, requiring the bank to reassess the collectibility of the loan. On December 31, 2020, the bank has determined that the remaining principal payments will be collected but the collection of the interest is unlikely. The bank has accrued the interest for 2020. Expected principal payments December 31, 2021 December 31, 2022 December 31, 2023

1,000,000 2,000,000 3,000,000

Present value of 1 at 8% For one period For two periods For three periods

.93 .86 .79

Required: 1. Compute the impairment loss on the loan receivable 2. Prepare journal entries for 2020, 2021 and 2022.

Answer: Requirement 1 31-Dec-21 (1,000,000 *.93) 31-Dec-22 (2,000,000*.86) 31-Dec-23 (3,000,000*.79) Total percent value of loan Loan receivable- Dec. 31, 2020 Accrued interest (6,000,000*8%) Total carrying amount Percent value of loan Impairment loss

6,000,000 480,000 6,480,000 5,020,000 1,460,000

930,000 1,720,000 2,370,000 5,020,000

Requirement 2 2020 Impairment loss Accrued interest receivable Allowance for loan impairment 2021 Cash Loan receivable Allowance for loan impairment Interest income (5,020,000*8%) 2022 Cash Loan receivable Allowance for loan impairment Interest income

Loan receivable -Dec. 31, 2021 Allowance for loan impairment (980,000-401,600) Carrying amount - Dec. 31, 2021 Interest income for 2022 (4,421,600*8%)

2023 Cash Loan receivable Allowance for loan impairment Interest income Loan receivable -Dec. 31, 2022 Allowance for loan impairment (578,400-353,672) Carrying amount - Dec. 31, 2022 Interest income for 2023 (2,775,328*8%) Allowance per book Difference due to rounding

1,460,000 480,000 980,000 1,000,000 1,000,000 401,600 401,600 2,000,000 2,000,000 353,728 353,728

5,000,000 -578,400 4,421,600 353,728

3,000,000 3,000,000 224,672 224,672 3,000,000 -224,672 2,775,328 222,026 224,672 2,646...