EXERCISES – LOANS RECEIVABLE
Exercise 1 (IFRS)/MODIFIED
(Problem 7-1 Intermediate Accounting Volume 1 – 2019 edition by Valix, Peralta, Valix)
Nasty Bank granted a loan to a borrower on January 1, 2019. The interest on loan is 10% payable annually starting
December 31, 2019. The loan matures in three years on December 31, 2021. Data related to the loan are:
Principal amount
Origination fees charged against the borrower
Direct origination costs incurred
P
4,000,000
342,100
150,000
After considering the origination fees charged against the borrower and the direct origination cost incurred, the effective
rate on the loan is 12%.
Required:
1. What is the Unearned Interest Income balance as at January 1, 2019?
2. What is the carrying value of loan receivable as at January 1, 2019?
3. What is the total present value of cash flows as at January 1, 2019?
4. Prepare all indicated entries for 2019, 2020 and 2021.
SOLUTION:
Requirement 1:
Origination fees charged against the borrower
Direct origination costs incurred
Unearned Interest Income, January 1, 2019
P
P
Requirement 2:
Principal amount of loan
Unearned Interest Income, January 1, 2019 (Req. 1)
Carrying value of loan receivable, January 1, 2019
Requirement 3:
PV of principal amount (P 4,000,000 x 0.7118)
PV of interest (P 4,000,000 x 10% x 2.4018)
Total present value of cash flows, January 1, 2019
Notes:
Total present value of cash flows at ER of 12%, 1/1/19
Actual cash flows at 1/1/2019
Difference (Immaterial)
P
P
P
P
P
P
Requirement 4:
Date
2019
Jan.
1
Dec.
Transactions
Journal Entries
Account Names
Debit
Credit
To record the loan.
1
Receipt of origination fees
from borrower.
1
Incurrence of direct
origination costs
31
Receipt of interest income.
31
Amortization of unearned
interest income
1
Date
Interest
Received
PRT) @ 10%
Table of Amortization
Interest
Income
(PV x 12%)
Amortization
Carrying Value
(PV +
Amortization)
1/1/2019
12/31/2019
12/31/2020
12/31/2021
Date
2020
Dec. 31
31
2021
Dec. 31
Transactions
Journal Entries
Account Names
Debit
Credit
Receipt of interest income.
Amortization of unearned
interest income
Receipt of interest income.
31
Amortization of unearned
interest income
31
Collection of loan.
Exercise 2 (IFRS) / MODIFIED
(Problem 7-3 Intermediate Accounting Volume 1 – 2019 edition by Valix, Peralta, Valix)
Pauper Bank granted a loan to a borrower on January 1, 2019. The interest on the loan is 8% payable annually starting
December 31, 2019. The loan matures in three years on December 31, 2021, data related to the loan are:
Principal amount
Origination fees charged against the borrower
Direct origination costs incurred
P
3,000,000
100,000
260,300
After considering the origination fees charged to the borrower and the direct origination cost incurred, the effective
date on the loan is 6%.
Required:
1. What is the Unearned Interest Income balance as at January 1, 2019?
2. What is the carrying value of loan receivable as at January 1, 2019?
3. What is the total present value of cash flows as at January 1, 2019?
4. Prepare all indicated entries for 2019, 2020 and 2021.
SOLUTION:
Requirement 1:
Origination fees charged against the borrower
Direct origination costs incurred (to the extent of balance)
Unearned Interest Income, January 1, 2019
P
P
Notes: The excess of P 160,300 (P 260,300 – P 100,000) is charged to Direct Origination Costs account. No need to
compute the present value of total cash flow using the present value factor.
Requirement 2:
Principal amount of loan
Unearned Interest Income, January 1, 2019 (Req. 1)
Unearned Interest Income, January 1, 2019
Requirement 3:
Principal amount
Direct origination costs - excess
Total present value of cash flows, January 1, 2019
P
P
P
P
2
Requirement 4:
Date
2019
Jan.
1
Dec.
Transactions
Journal Entries
Account Names
Debit
Credit
To record the loan.
1
Receipt of origination fees
from borrower.
1
Incurrence of direct
origination costs
31
Receipt of interest income.
31
Amortization of unearned
interest income
Table of Amortization
Date
Interest
Received
PRT) @ 8%
Interest
Income
(PV x 6%)
Carrying Value
Amortization
(PV Amortization)
1/1/2019
12/31/2019
12/31/2020
12/31/2021
Date
2020
Dec. 31
31
2021
Dec. 31
Transactions
Journal Entries
Account Names
Debit
Credit
Receipt of interest income.
Amortization of unearned
interest income
Receipt of interest income.
31
Amortization of unearned
interest income
31
Collection of loan.
3
THREE STAGES IMPAIRMENT APPROACH
(Source: Intermediate Accounting 2019 Edition Volume 1 by Valix, Peralta, Valix)
Stage 1 –
This stage covers debt instruments that have not declined significantly in credit quality since initial recognition or that
have LOW CREDIT RISK. Under this scenario, a 12-MONTH EXPECTED CREDIT LOSS (ECL) is recognized.
12-month expected credit loss (ECL) is defined as the portion of the lifetime expected credit loss from default events that are possible
within 12 months after the reporting period.
Interest income is computed based on the gross carrying amount or face amount.
Stage 2 –
This stage covers debt instruments that have decline significantly in credit quality since initial recognition but do not
have objective evidence of impairment. Under this scenario, a LIFETIME EXPECTED CREDIT LOSS is recognized.
There is rebuttable presumption that there is a significant increase in credit risk if the contractual payments are more
than 30 days past due.
Lifetime Expected Credit Loss is defined as the expected credit loss that results from all default events over the expected life of the
instruments.
Lifetime Expected Credit Loss shall always be recognized for trade receivables through aging, percentage of accounts receivable and
percentage of sales.
Interest income is computed based on the gross carrying amount or face amount.
Stage 3 –
This stage covers debt instruments that have objective evidence of impairment at the reporting date. Under this
scenario, a LIFETIME EXPECTED CREDIT LOSS is recognized.
Interest income is computed based on the net carrying amount or face amount which is equal to the gross carrying amount or face
amount minus allowance for credit los.
4
Three - Stage Impairment Approach
Stages
1
Coverage
It covers debt instruments that have
not declined significantly in credit
quality since its initial recognition or
that have low credit risk.
Characteristics
Have not declined
significantly in credit
quality
Have low credit risk
What to recognize?
12-month expected
credit loss which is the
portion of the lifetime
credit loss from default
events that are possible
within 12 months after the
reporting period.
Related Computation Format
Carrying amount at reporting date
Less: PV of expected cash flow - probable
Carrying amount at reporting date
Multiply by probability of collection
Expected cash flow - Probable
Multiply by PV of 1 at % for n periods
Expected credit loss
Multiply by probability of default within 12 months
12-month Expected Credit Loss
xxx
xxx
%
xxx
xxx
xxx
xxx
%
xxx
Related Journal Entry
Impairment Loss
Allowance for Loan Impairment
xxx
xxx
Statement of Financial Position Presentation
Loans Receivable
Allowance for Loan Impairment
Carrying Amount at reporting date
Stages
Coverage
2
It covers debt instruments that have
declined significantly in credit quality
since initial recognition but do not
have objective evidence of
impairment.
Characteristics
What to recognize?
Have declined
significantly in credit
quality
A lifetime expected
credit loss which is the
expected credit loss that
results from all default
Do not have objective events over the expected
life of the instrument.
evidence of
xxx
(xxx)
xxx
Related Computation Format
Carrying amount at reporting date
Less: PV of expected cash flow - probable
Carrying amount at reporting date
Multiply by probability of collection
Expected cash flow - Probable
Multiply by PV of 1 at % for n periods
Expected credit loss
Multiply by probability of default within n periods
Lifetime expected credit loss allowance
Less: Unadjusted allowance at reporting date
Impairment Loss
xxx
xxx
%
xxx
xxx
xxx
xxx
%
xxx
xxx
xxx
Related Journal Entry
Impairment Loss
Allowance for Loan Impairment
xxx
xxx
Statement of Financial Position Presentation
Loans Receivable
Allowance for Loan Impairment
Carrying Amount at reporting date
Stages
3
Coverage
It covers debt instruments that have
objective evidence of impairment at
the reporting date.
Characteristics
Have declined
significantly in credit
quality
Have objective
evidence of
What to recognize?
A lifetime expected
credit loss
xxx
(xxx)
xxx
Related Computation Format
Carrying amount at reporting date
Less: PV of expected cash flow - probable
Carrying amount at reporting date
Multiply by probability of collection
Expected cash flow - Probable
Multiply by PV of 1 at % for n periods
Lifetime expected credit loss
Less: Unadjusted allowance at reporting date
Impairment Loss
xxx
xxx
%
xxx
xxx
xxx
xxx
xxx
xxx
5
Exercise 3 (IAA) / MODIFIED
(Problem 7-5 Intermediate Accounting Volume 1 – 2019 edition by Valix, Peralta, Valix)
Solvent Bank loaned P 10,000,000 to a borrower on January 1, 2017. The terms of the loan require principal payments
of P 2,000,000 each year for 5 years plus interest at 8%. The first principal and interest payment is due on December
31, 2017. The borrower made the required payments on December 31, 2017 and December 31, 2018. However, during
2019 the borrower began to experience financial difficulties, requiring the bank to reassess the collectibility of the loan.
On December 31, 2019, 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 2019.
The principal payments are expected to be P 1,000,000 on December 31, 2020; P 2,000,000 on December 31, 2021;
and P 3,000,000 on December 31, 2022. The present value of 1 at 8% for one period is 0.93, for two periods is 0.86,
and for three periods is 0.79.
REQUIRED:
1. Compute the impairment loss on the loan receivable.
2. Prepare all indicated entries for 2019, 2020, 2021 and 2022.
Hints:
1) This is about loan receivable with defaults by borrower. Therefore, it is required to determine the present value of
estimated future cash flows discounted at the original effective rate of the loan which is 8% for this problem.
2) In the problem, the default started on the third year (Year2019). Therefore, after this date or year (Year 2020) to
last date or year of future cash flows (year 2022 to complete the adjusted 5 years term), the present value of
estimated future cash flows discounted at the original effective rate is determined. This is in accordance with PFRS
9, paragraph 5.2.2.
SOLUTIONS:
Requirement 1 – Impairment loss computation
Face value of loan on January 1, 2017
Payments made prior to default:
On December 31,2017
On December 31, 2018
Face value at December 31, 2019
Accrued interest Receivable (P 6,000,000 x 8%)
Carrying value at December 31, 2019
Present value of expected future cash flows:
On December 31, 2020 (P 1,000,000 x 0.93)
On December 31, 2021 (P 2,000,000 x 0.86)
On December 31, 2022 (P 3,000,000 x 0.79)
IMPAIRMENT LOSS
Requirement 2 – Journal Entries for 2019, 2020, 2021, 2022
Date
2019
Dec. 31
2020
Dec. 31
31
Transactions
Journal Entries
Account Names
Debit
Credit
Provision for loan
impairment
Collection of loan
Recognition of interest
income
Date
Annual
Payment
(GIVEN)
Table of Amortization
Interest
Face Value
Income
(deduct the
(At 8%)
payment)
(Amortization
of ALI)
Allowance for
Impairment
Loss
(Deduct Int.
Inc.)
Carrying
Amount
(FV – AIL)
12/31/2019
12/31/2020
12/31/2021
12/31/2022
TOTAL
6
Date
2021
Dec. 31
31
Date
2022
Dec. 31
31
Transactions
Journal Entries
Account Names
Debit
Credit
Journal Entries
Account Names
Debit
Credit
Collection of loan
Recognition of interest
income
Transactions
Collection of loan
Recognition of interest
income
Exercise 4 (IFRS) / MODIFIED
(Problem 7-5 Intermediate Accounting Volume 1 – 2019 edition by Valix, Peralta, Valix)
On January 1, 2019, Global Bank loaned P 3,000,000 to a borrower. The contract specified that a loan had a 6-year
term and a 9% interest rate.
Interest is payable annually every December 31 and the principal amount will be collected on December 31, 2024.
Interest is collected for 2019.
On December 31, 2019, the bank determined that the loan has a 12-month probability of default of 2% and expected
to collect only 90% of the loan.
On December 31, 2020, the bank determined that there is a significant increase in the credit risk of the loan but no
objective evidence of impairment.
Based on relevant information, the bank concluded that there is a 30% probability of default over the remaining term
of the loan and it is expected that only 60% of the loan will be collected. Interest is collected for 2020.
On December 31, 2021, the borrower was under financial difficulty and the loan was considered impaired.
The bank agreed that only 40% of the principal will be collected on due date. Interest is collected for 2021.
The present value of 1 at 9% is 0.65 for 5 periods, 0.71 for four periods, and 0.77 for the three periods.
Required:
1. Prepare journal entries from 2019, 2020 and 2021.
2. Compute the carrying amount of the loan receivable on December 31, 2019, 2020 and 2021.
3. Prepare journal entries for 2022, 2023 and 2024.
SOLUTION GUIDE:
Requirement 1 – Journal entries for the years 2019, 2020 and 2021.
Date
2019
Jan
1
Dec.
Transactions
Journal Entries
Account Names
Debit
Credit
Granting of loan.
31
Collection of annual
interest income
31
Recognition of 12-month
expected credit loss
7
2020
Dec. 31
31
2021
Dec. 31
31
Collection of annual
interest income
Recognition of Lifetime
Expected Credit Loss
Collection of annual
interest income
Impairment of Loan
Receivable under Stage 3
Requirement 2 – Carrying Amount of Loan Receivable at December 31, 2019, 2020 and 2021.
12/31/2019
Loan Receivable
Allowance for Loan Impairment
Carrying amount of Loan Receivable at year end
2,975,100
12/31/2020
2,483,400
12/31/2021
924,000
Requirement 1 – Journal entries for the years 2022, 2023 and 2024.
Date
2022
Dec. 31
2023
Dec. 31
2024
Dec. 31
Dec.
31
Transactions
Journal Entries
Account Names
Debit
Credit
Amortization of Allowance
for Loan Impairment
Amortization of Allowance
for Loan Impairment
Amortization of Allowance
for Loan Impairment
Collection of loan
receivable at maturity date
8
9