Intermediate Accounting 1 – LOANS RECEIVABLE AND IMPAIRMENT OF

FINANCIAL ASSETS
Problem 1 The interest rate on the loan is 10% payable annually starting December 31, 2016. The loan
matures in five years on December 31, 2020.
Principal Amount 4,000,000
Direct Origination Cost 61,500
Origination fee received from borrower 350,000

The effective rate on the loan after considering the direct origination cost and origination fee received is 12%.
Required:
1. Compute the carrying amount of the loan receivable on January 1, 2016.
2. Prepare a table of amortization for the loan receivable.
3. Prepare the journal entries for 2016 and 2017.

Problem 2 On January 1, 2016, Empress Bank granted a loan to a borrower. The interest on the loan is
10% payable annually on December 31, 2016. The loan matures in three years on December 31, 2018.
Principal Amount 5,000,000
Direct Origination Cost incurred 457,500
Origination fee charged against the borrower 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. Compute the carrying amount of the loan receivable on January 1, 2016.
2. Prepare a table of amortization for the loan receivable.
3. Prepare the journal entries for 2016, 2017 and 2018.

Problem 3 Solvent Bank loaned P10,000,000 to a borrower on January 1, 2014. 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, 2014. The borrower made the required
payments on December 31, 2014 and December 31, 2015.
However, during 2016 the borrower began to experience financial difficulties, requiring the bank to reassess the
collectibilty of the loan.
On the December 31, 2016, the bank has determined that the remaining principal payments will be collected but
the collection of interest is unlikely. The bank has accrued the interest for 2016.

Expected principal payments

December 31, 2017 P 1,000,000
December 31, 2018 2,00,000
December 31, 2019 3,000,000

Present Value of 1 at 8%
For one period .93
For two periods .86
For three periods .79

Required:
1. Compute the carrying amount of the loan before impairment.
2. Compute the recoverable amount of the loan.
3. Compute the impairment loss on the loan.
4. Prepare journal entries for 2016, 2017 and 2018.

Problem 4 On December 31, 2016, Durable Bank has a loan receivable of P4,000,000 from a borrower
that is carrying at face value and is due in December 31, 2021. Interest on the loan is payable at 9% each
December 31.
The borrower paid the interest due on December 31, 2016 but informed the bank that it would probably miss the
next two years’ interest payments because of financial difficulty.
After that, the borrower is expected to resume the annual interest payment but it would make the principal
payment one year late, with interest paid for that additional year at the time of principal payment.
Present Value of 1 at 9%
One period .917
Two periods .842
Three periods .772
Four periods .708
Five periods .650
Six periods .596

Required:
1. Compute the carrying amount of the loan before impairment.
2. Compute the recoverable amount of the loan.
3. Compute the impairment loss on the loan.
4. Prepare journal entries for 2016 to 2022.