Impairment of Loans and Receivable Financing

THEORY OF ACCOUNTS 1. In calculating the carrying amount of loan receivable, the lender adds to the principal I. Direct origination cost II. Indirect origination cost III. Origination fee charged to borrower a. I only c. I and III only b. I and II only d. I, II, and III 2. Subsequent to initial recognition, a loan receivable shall be measured at a. Cost c. Amortized cost using the effective b. Amortized cost using the straight interest method line method d. Fair value 3. If there is evidence that an impairment loss on a loan receivable has been incurred, the loss is equal to the a. Excess of the carrying amount of the loan receivable over the present value of the cash flows related to the loan b. Excess of the present value of cash flows related to the loan over the carrying amount of the loan receivable c. Excess of the carrying amount of the loan over the principal amount of the loan d. Excess of the principal amount of the loan over its carrying amount. 4. ABC Bank loaned an amount on January 1, 2013, the proceeds of which will be used to finance its planned expansion in the latter half of the year. The carrying amount of the loan on initial recognition exceeded the proceeds received. Which of the following situations could have caused this? a. The direct origination costs incurred were less than the origination fees charged. b. The indirect origination costs incurred, which were less than the loan origination fees charged, were more than the direct origination costs incurred. c. The origination fees charged were less than the direct origination costs incurred. d. The origination fees charged were more than the indirect origination costs incurred. The indirect origination costs incurred were more than the direct origination costs incurred. 5. XYZ Bank entered into contract of loan on December 31, 2013, with a face amount of 5,000,000 and interest of 12% payable annually every January 1 thereafter, starting January 1, 2014, for 5 years. At the end of 2015, the creditor began to experience financial difficulties and was unable to repay the required interest payment. XYZ forgave the interest on the loan as the collection is unlikely, but the principal amount will be due in installments of 1,000,000 at each interest payment date. What time value of money concept must XYZ Bank use to compute the present value of remaining cash flows? a. Present value of 1 c. Present value of an annuity due of b. Present value of an ordinary 1 annuity of 1 d. Future value of 1 6. A note receivable bearing a reasonable interest rate is sold to a bank with recourse. The note receivable discounted account was appropriately credited. The note receivable discounted accounted should be reported as a. Contra-asset account for the proceeds from the discounting transaction b. Contra-asset account for the face amount of the note c. Liability account for the proceeds from the discounting transaction d. Liability account for the face amount of the note 7. If receivables are hypothecated against borrowings, the amount of receivables involved should be a. Disclosed in the notes b. Excluded from the total receivables with disclosure c. Excluded from the total receivables with no disclosure d. Excluded from the total receivables and a gain or loss recognized between the face value and the amount of borrowings. 8. After being held for 30 days, a 120-day 12% interest-bearing note receivable was discounted at a bank at 15%. The amount received from the bank is equal to a. Maturity value at 15% less discount at 12% b. Maturity value at 12% less discount at 15% c. Maturity value at 12% less discount at 12% d. Maturity value at 15% less discount at 15%

9. All but one of the following are required before a transfer of receivables can be recorded as a sale. a. The transferred receivables are beyond the reach of the transferor and its creditors. b. The transferor has not kept effective control over the transferred receivables through a repurchase agreement c. The transferor maintains continuing involvement d. The transferee can pledge or sell the transferred receivables. PROBLEM 1. (Journal Entries) The Voice Bank loaned a borrower P5,000,000 on January 1, 2013, payable in 3 years plus 8% annual interest, starting December 31. Data related to the loan are: Principal amount Origination fees charged Direct origination cost incurred

P

5,000,000 500,000 250,000

After considering the origination fees charged to the borrower and the direct origination cost incurred, the effective rate on the loan is 9.97%. Prepare all indicated entries for 2013, 2014, and 2015. PROBLEM 2. (Journal Entries) The Voice Bank loaned a borrower P3,000,000 on January 1, 2013, payable in 3 years plus 8% annual interest, starting December 31. Data related to the loan are: Principal amount Origination fees charged Direct origination cost incurred Indirect origination cost incurred

P

3,000,000 130,700 280,000 65,000

After considering the origination fees charged to the borrower and the direct origination cost incurred, the effective rate on the loan is 6.16%. Prepare all indicated entries for 2013, 2014, and 2015. PROBLEM 3. (Journal Entries) Cozy Bank loaned a borrower P12,150,000 on January 1, 2011. The terms of the loan were payment in full on January 1, 2016, plus annual interest payment at 12%. The interest payment was made as scheduled on January 1, 2012. However, due to financial setbacks, the borrower was unable to make its 2013 interest payment. The bank considered the loan impaired and projected the cash flows from the loan on December 31, 2013. The bank accrued the interest on December 31, 2012, but did not continue to accrue interest for 2013 due to the impairment of the loan. The effective rate after impairment would be 14%. The projected cash flows are: Date of cash flow December 31, 2014 December 31, 2015 December 31, 2016 December 31, 2017

Amount projected on 12/31/13 P 810,000 1,620,000 3,240,000 6,480,000

Prepare the entries for 2013, 2014, 2015, 2016, and 2017. Round off PV to 2 decimal places.

PROBLEM 4. (Journal Entries) On December 31, 2013, Durable Bank has a loan receivable of P6,750,000, from a borrower that it is carrying at face value and is due on December 31, 2018. Interest on the loan is payable at 7% each December 31. The borrower paid the interest due on December 31, 2013 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 its annual interest payment but it would make the principal payment one year late, with interest paid for that additional year at the time of payment. Prepare all entries from 2013 to 2019. Round off PV factors to 3 decimal places. PROBLEM 5. Knowhow Bank loaned P10,000,000 to a borrower on January 1, 2011. The terms of the loan require principal payments of P2,000,000 each year for 5 years plus interest at 10%. The first principal and interest payment is due on January 1, 2012. The borrower made the required payments during 2012 and 2013. However, during 2013 the borrower began to experience financial difficulties, requiring the bank to reassess the collectability of the loan. On December 31, 2013, the bank has determined that the remaining principal payment will be collected but the collection of the interest is unlikely. The bank accrued the interest for 2013. The principal payments are expected to be P1,000,000 on January 1, 2013, P2,000,000 on January 1, 2014 and P3,000,000 on January 1, 2015. Round off present value factors to two decimal places. 1. What is the loan impairment loss on December 31, 2013? a. 1,180,000 c. 1,290,000 b. 2,000,000 d. 1,780,000 2. What is the interest income for 2014? a. 531,000 c. 600,000 b. 431,000 d. 500,000 3. What is the carrying amount of the loan receivable on December 31, 2014? a. 5,000,000 c. 4,310,000 b. 4,741,000 d. 3,122,000 PROBLEM 6. Harrison Company has a loan receivable with a carrying value of P15,000 at December 31, 2010. On January 3, 2011, the borrower, Thomas Clark Imports, declares bankruptcy, and Harrison estimates that it will collect only 60% of the loan balance. 1. Which of the following entries would Harrison make to record the impairment under IFRS? a. Loan Receivable 9,000 Impairment Loss 9,000 b. Loan Recovery Expense 6,000 Loan Receivable 6,000 c. Impairment Loss 9,000 Loan Receivable 9,000 d. Impairment Loss 6,000 Loan Receivable 6,000

2. Assume that on January 5, 2012, Harrison learns that Thomas Clark Imports has emerged from bankruptcy. As a result, Harrison now estimates that all but P1,500 will be repaid on the loan. Under IFRS, which of the following entries would be made on January 5, 2012? a. Loan Receivable 4,500 Recovery of Impairment Loss 4,500 b. Loan Receivable 1,500 Recovery of Impairment Loss 1,500 c. Bad Debt Expense 1,500 Impairment Loss 1,500 d. No journal entry is allowed under IFRS. PROBLEM 7. On December 1, 2013, Breakout Company assigned specific accounts receivable totaling P2,000,000 as collateral on a P1,500,000, 12% note from a certain bank. Breakout Company will continue to collect the assigned accounts receivable. In addition to the interest on the note, the bank also charged a 5% finance fee deducted in advance on the P1,500,000 value of the note. The December collections of the assigned accounts receivable amounted to P1,000,000 less cash discount of P50,000. On December 31, 2013, Breakout Company remitted the collections to the bank in payment for the interest accrued on December 31, 2013 and the note payable. 1. What amount of cash was received from the assignment of accounts receivable on December 31, 2013? a. 2,000,000 c. 1,900,000 b. 1,500,000 d. 1,425,000 2. What is the carrying amount of note payable on December 31, 2013? a. 500,000 c. 565,000 b. 550,000 d. 730,000 3. What amount should be disclosed as the equity of Breakout Company in assigned accounts on December 31, 2013? a. 500,000 c. 435,000 b. 450,000 d. 270,000 PROBLEM 8. Brawny Company factored P8,000,000 of accounts receivable to a finance entity on July 1 of the current year. Control was surrendered by Brawny Company. The factor assessed a fee of 5% and retained a holdback equal to 10% of the accounts receivable. In addition, the factor charged 15% interest computed on a weighted average time to maturity of the accounts receivable of 30 days. 1. What amount was initially received by Brawny Company from the factoring? a. 6,701,370 c. 7,501,370 b. 6,800,000. d. 6,700,000 2. Assuming all receivables are collected, what is the cost of factoring? a. 400,000 c. 898,630 b. 498,630 d. 98,630 PROBLEM 9. Tender Company accepted from a customer a P4,000,000, 90-day, 12% note dated August 31, 2013. On September 30, 2013, the entity discounted without recourse the note at 15%. However, the proceeds were not received until October 1, 2013. In the income statement for the year ended September 30, 2013, what amount should be reported as loss on note receivable discounting? a. 17,000 c. 40,000 b. 23,000 d. 0

PROBLEM 10. On November 1, 2013, Duress Company discounted with recourse at 10% a one-year, non-interest bearing, P2,050,000 note receivable maturing on January 31, 2013. The discounting of the note receivable is accounted for as a conditional sale with recognition of a contingent liability. 1. What amount of contingent liability should be disclosed in the financial statements for 2012? a. 2,050,000 c. 2,033,333 b. 2,000,000 d. 0 2. How much did Duress receive from the discounting transaction? a. 0 c. 2,033,333 b. 2,000,000 d. 1,998,750 PROBLEM 11. Undaunted Company discounted its own P5,000,000 one-year note at a bank, at a discount rate of 8%, when the prime rate was 6%. In recording the note in the statement of financial position prior to maturity, what rate should be used for the recording of interest expense? a. 6.00% c. 8.00% b. 6.42% d. 8.70% PROBLEM 12. Sun Inc. factors P2,000,000 of its accounts receivables without recourse for a finance charge of 5%. The finance company retains an amount equal to 10% of the accounts receivable for possible adjustments. Sun estimates the fair value of the recourse liability at P75,000. What would be recorded as a gain (loss) on the transfer of receivables? a. Loss of P100,000. c. Gain of P175,000. b. Loss of P375,000. d. Loss of P75,000. PROBLEM 13. Mark Co. assigned P400,000 of accounts receivable to Kwik Finance Co. as security for a loan of P335,000. Kwik charged a 2% commission on the amount of the loan; the interest rate on the note was 10%. During the first month, Mark collected P110,000 on assigned accounts after deducting P380 of discounts. Mark accepted returns worth P1,350 and wrote off assigned accounts totaling P2,980. 1. The amount of cash Mark received from Kwik at the time of the transfer was a. P301,500. b. P327,000. c. P328,300. d. P335,000. 2. Entries during the first month would include a a. debit to Cash of P110,380. b. debit to Bad Debt Expense of P2,980. c. debit to Allowance for Doubtful Accounts of P2,980. d. debit to Accounts Receivable of P114,710. PROBLEM 14. On February 1, 2010, Vinson Company factored receivables with a carrying amount of P300,000 to Jessie Company. Jessie Company assesses a finance charge of 3% of the receivables and retains 5% of the receivables. Relative to this transaction, you are to determine the amount of loss on sale to be reported in the income statement of Vinson Company for February. The recourse obligation has a fair value of P1,500. 1. Assume that Vinson factors the receivables on a without recourse basis. The loss to be reported is a. P0. b. P9,000. c. P15,000. d. P24,000.

2. Assume that Vinson factors the receivables on a with recourse basis. The loss to be reported is a. P9,000. b. P10,500. c. P15,000. d. P25,500. PROBLEM 15. (Journal Entries) Prepare the necessary entries in the books of Walleye Company to record the following transactions. January 1 March 1 July 1

The entity sold merchandise for P500,000 accepting a note of P500,000 for six months with interest to be paid at maturity at 12%. The entity discounted the note without recourse at its local bank at 15%. The customer paid the bank in full.

PROBLEM 16. (Journal Entries) Prepare all entries in the books of Morale Company, assuming the discounting transaction is accounted for as a conditional sale. March 14 Sale of merchandise, P2,050,000 to a customer, FOB destination, 2/10, n/30. April 7 Receipt of a 60-day, 12% note dated April 5 from the customer. The face of the note was the amount of the invoice minus freight charge of P50,000 paid by the customer in connection with the March 14 sale. April 20 The note of the customer was discounted with the bank at 15%. June 4 Receipt of notification from the bank that the customer dishonored its note. Accordingly, the entity paid the bank the amount due including protest fee and other charges of P10,000. July 4 Receipt of cash from the customer for the full amount of its indebtedness plus interest on the original face value. PROBLEM 17. (Journal Entries) On January 1, 2013, Machete Company sold land with carrying amount of P1,500,000 in exchange for a 9-month, 10% note with face value of P2,000,000. The 10% rate properly reflects the time value of money for this type of note. On April 1, 2013, the entity discounted the note with recourse. The bank discount rate is 12%. The discounting transaction is accounted for as a secured borrowing. On October 1, 2013, the maker dishonored the note receivable. The entity paid the bank the maturity value of the note plus protest fee of P10,000. On December 31, 2013, the entity collected the dishonored note in full plus 12% annual interest on the total amount due.

SUGGESTED ANSWERS 1. A 2. C 3. A 4. C 5. C

6. B 7. A 8. B 9. C

PROBLEM 5. 1. C 2. B 3. B

PROBLEM 9. B PROBLEM 10. 1. A 2. D

PROBLEM 6. 1. D 2. A

PROBLEM 11. D PROBLEM 12. A

PROBLEM 7. 1. D 2. C 3. C

PROBLEM 13. 1. C 2. C

PROBLEM 8. 1. A 2. B

PROBLEM 14. 1. B 2. B

(JOURNAL ENTRIES) Date Particulars PROBLEM 1 1/1/13 Loans Receivable Cash Cash Unearned Interest Income Unearned Interest Income Cash 12/31/13

12/31/14

12/31/15

Cash Interest Income Unearned Interest Income Interest Income Cash Interest Income Unearned Interest Income Interest Income Cash Interest Income Unearned Interest Income Interest Income Cash Loans Receivable

Debit

Credit

5,000,000 5,000,000 500,000 500,000 250,000 250,000 400,000 400,000 73,575 73,575 400,000 400,000 80,910 80,910 400,000 400,000 95,515 95,515 5,000,000 5,000,000

PROBLEM 2 1/1/13

12/31/13

12/31/14

12/31/15

PROBLEM 3 12/31/13 12/31/14

12/31/15

12/31/16

12/31/16

PROBLEM 4 12/31/13

12/31/14 12/31/14

Loans Receivable Cash Cash Direct origination costs Direct origination costs Cash Indirect origination costs Cash Cash Interest Income Interest Income Direct origination costs Cash Interest Income Interest Income Direct origination costs Cash Interest Income Interest Income Direct origination costs Cash Loans Receivable

3,000,000

Loan impairment loss Allowance for L/I Interest receivable Cash Loans Receivable Allowance for L/I Interest Income Cash Loans Receivable Allowance for L/I Interest Income Cash Loans Receivable Allowance for L/I Interest Income Cash Loans Receivable Allowance for L/I Interest Income

5,143,500

Loan impairment loss Allowance for L/I Cash Interest Income Allowance for L/I Interest Income Allowance for L/I Interest Income

3,000,000 130,700 130,700 280,000 280,000 65,000 65,000 240,000 240,000 46,003 46,003 240,000 240,000 48,837 48,837 240,000 240,000 54,460 54,460 3,000,000 3,000,000 3,685,500 1,458,000 810,000 810,000 1,015,740 1,015,740 1,620,000 1,620,000 1,040,429 1,040,429 3,240,000 3,240,000 970,880 970,880 6,480,000 6,480,000 658,451 658,451 856,845 856,845 472,500 472,500 412,521 412,521 444,324 444,324

12/31/15 To 12/31/18 12/31/19

Cash

472,500 Interest Income

Cash

472,500 7,222,500

Interest Income Loans Receivable PROBLEM 15 1/1/13 3/1/13

7/1/13 PROBLEM 16 3/14/13 4/7/13 4/20/13

6/4/13

7/4/13

PROBLEM 17 1/1/13 4/1/13

10/1/13

12/31/13

Note receivable Sales Cash Loss on discounting Note receivable Interest income No entry

472,500 6,750,000 500,000 500,000 503,500 6,500 500,000 10,000

Accounts receivable Sales Note receivable Freight out Accounts receivable Cash Loss on discounting Note receivable discounted Interest income Accounts receivable Cash Note receivable discounted Note receivable Cash Accounts receivable Interest income

2,050,000

Note receivable Land Gain on sale of land Cash Interest expense Liability for NRD Interest Income Accounts receivable Cash Liability for NRD Note receivable Cash Accounts receivable Interest income

2,000,000

2,050,000 2,000,000 50,000 2,050,000 209,750 8,250 2,000,000 10,000 2,050,000 2,050,000 2,000,000 2,000,000 2,070,000 2,050,000 20,000

1,500,000 500,000 2,021,000 29,000 2,000,000 50,000 2,160,000 2,160,000 2,000,000 2,000,000 2,224,800 2,160,000 64,800