Matt S.

Villalongja BSA – A11

Sean Justin Espina, CPA

Chapter 7: Loan Receivables

Questions p. 186
1. Define loan receivable.
Answer: Loan Receivable is a financial asset arising from a loan granted by a bank
or other financial institution to a borrower or client. The term of the loan may
be short-term but, in most cases, the repayment periods cover several
years.
2. Explain the initial measurement of loan receivable.
Answer: Initial measurement of loan receivable:
Fair Value + transaction costs (directly attributable to the acquisition of
financial asset)
*Fair Value = Transaction Price = Amount of the loan granted
*Transactions costs includes Direct origination costs
3. Explain the subsequent measurement of loan receivable.
Answer: PFRS 9 provides that if the business model in managing financial asset is
to collect contractual cash flows on specified dates and the contractual
cash flows are solely payments of principal and interest, the financial asset
shall be measured at amortized cost.
4. What is the meaning of amortized cost in relation to loan receivable?
Answer: Amortized cost is the amount at which the loan recivalbe is measured
initially minus principal repayment, plus or minus the cumulative
amortization of any difference between the initial amount recognized and
the principal maturity amount, minus reduction for impairment or
uncollectibility.
5. What are origination fees in relation to a loan?
Answer: Fees charged by the bank against the borrower for the creation of loan. It
includes compensation for activities such as evaluating the borrower’s
financial condition, evaluating guarantees, collateral and other security,
negotiating the terms of the loan, preparing and processing documents and
closing the loan transaction.
6. Explain the accounting for origination fees.
Answer: It is recognized as unearned interest income and amortized over the term
of the loan. If it is not chargeable against the borrower, the fees known as
direct origination costs.
7. Explain direct origination costs.
Answer: Direct origination costs are deferred and also amortized the term of the
loan. Preferably costs are offset directly against any unearned origination
fees received.
8. Explain the treatment of origination fees received from borrower and direct origination
costs incurred by the lender.
Answer: If the origination fees received exceed the direct origination costs, the
difference is unearned interest income and the amortization will increase
interest income.
 If the direct origination costs exceed the origination fees received, the
difference is charged to direct origination costs and the amortization will
decrease interest income.
9. Explain the treatment of indirect origination costs incurred by the lender.
Answer: Treatment of indirect origination costs incurred by the lender should be as
outright expense.
10. Explain the measurement of impairment of loan.
Answer: An entity should consider: the probability0weighthed outcome, the time
value of money, reasonable and supportable information that is available
without undue cost or effort.
11. What is the computation of the carrying amount of the loan receivable subsequent to
impairment?
Answer: The amount to impairment loss can be measured as the difference between
the carrying amount and the present value of estimated future cash flows
discounted at the original effective rate.
12. Explain the meaning of credit risk.
Answer: Credit risk is the risk that one party to a financial instrument will cause a
financial loss for the other party by failing to discharge an obligation.
13. Define credit loss.
Answer: A loss that a business or financial organization records, which is caused by
customers not paying money they owe.
14. Distinguish 12-month expected credit loss and lifetime expected credit loss.
Answer: 12-month expected credit loss is defined as the portion of the lifetime
expected credit loss from default events that are possible within 12 months
after the reporting period. While lifetime expected credit loss is defined as
the expected credit loss that results from all default events over the
expected life of the instrument.
15. Explain the three-stage approach of loan impairment.
Answer: Stage 1. This stage covers debt instruments that have not declined
significantly in credit quality since initial recognition or that have low credit
risk. Stage 2. This stage covers debt instruments that have declined
significantly in credit quality since initial recognition but do not have
objective evidence of impairment. Stage 3. This stage covers debt
instrument that have objective evidence of impairment at the reporting date.

Problem 7–2
Awesome Bank granted a loan to a borrower on January 1, 2019. The interest rate on the loan
is 10% payable annually starting December 31, 2019. The loan matures in five years on
December 31, 2023.
Principal Amount 4,000,000
Direct origination cost 150,000
Origination fee received from borrower 342,100

The effective rate on the loan after considering the direct origination cost and the origination fee
received is 12%.
Requirement 1
Compute the carrying amount of the loan receivable on January 01, 2019.
Origination fee received 350,000
Direct origination cost ( 61,500)
Unearned interest income 288,500

Note receivable 4,000,000

Unearned interest income ( 288,500)
Carrying amount – 1/1/2019 3,711,500
Requirement 2
Prepare a table of amortization for the loan receivable.
10% Interest 12% Interest
Date Amortization Carrying Amount
Received Income
01/01/2019 400,000 3,711,500
12/31/2019 400,000 445,380 45,380 3,756,880
12/31/2020 400,000 450,826 50,826 3,807,706
12/31/2021 400,000 456,925 56,925 3,864,631
12/31/2022 400,000 463,756 63,756 3,928,387
12/31/2023 400,000 471,613 71,613 4,000,000

Requirement 3
Prepare the journal entries for 2019 and 2020.
2019
January 1 Loan Receivable 4,000,000
Cash 4,000,000

1 Cash 350,000
Unearned Interest Income 350,000

1 Unearned Interest Income 61,500

Cash 61,500

December 31 Cash 400,000

Interest Income 400,000

31 Unearned Interest Income 45,380

Interest Income 45,380

2020
December 31 Cash 400,000
Interest Income 400,000

31 Unearned Interest Income 50,826

Interest Income 50,826
Problem 7–4
On January 1, 2019, Empress Bank granted a loan to a borrower. The interest on the loan is
10% payable annually on December 31, 2019. The loan matures in 3 years on December 31,
2021.
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%.
Requirement 1
Determine the carrying amount of the loan on January 01, 2019.
Principal Amount 5,000,000
Direct origination cost incurred 457,500
Origination fee charged against borrower ( 200,000)
Carrying amount – 1/1/2019 5,257,500

Requirement 2
Prepare a table of amortization of the direct origination cost.
10% Interest 8% Interest
Date Amortization Carrying Amount
Received Income
01/01/2019 5,257,500
12/31/2019 500,000 420,600 79,400 5,178,100
12/31/2020 500,000 414,248 85,752 5,092,348
12/31/2021 500,000 407,652 92,348 5,000,000

Requirement 3
Prepare the journal entries for 2019, 2020 and 2021.
2019
January 1 Loan Receivable 5,000,000
Cash 5,000,000

1 Direct origination cost 457,500

Cash 457,500

1 Cash 200,000
Direct origination cost 200,000

December 31 Cash 500,000

Interest Income 500,000

31 Interest Income 79,400

Direct origination cost 79,400

2020
December 31 Cash 500,000
Interest Income 500,000

31 Interest Income 85,752

Direct origination cost 85,752

2021
December 31 Cash 500,000
Interest Income 500,000

31 Interest Income 92,348

Direct origination cost 92,348

31 Cash 5,000,000
Loan receivable 5,000,000