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    Impairment of Loans and Notes Receivable

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    Impairment of Loans and Notes Receivable

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    milescy09
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    Impairment of Loans and Notes Receivable

    Uploaded by

    milescy09
    N/A

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
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    FAR 0 – IMPAIRMENT OF LOANS AND NOTES

    SAMPLE PROBLEM 1

    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 are 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 collectability 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. The principal payments are expected to be
    P1,000,000 on December 31, 2021, P2,000,000 on December 31, 2022 and
    P3,000,000 on December 31, 2023.
    Prepare the necessary journal entries.

    SAMPLE PROBLEM 2

    On December 31, 2016, Firestorm Company has an outstanding note from Ronnie
    Company having a face amount of P3,000,000, a stipulated interest rate of 10% and
    a scheduled maturity date of December 31, 2016. Firestorm Company which was
    currently under severe financial stress, failed to pay interest in 2016 and requestion
    for the following concessions; a) waiver to pay interest in 2016; b) extension of
    maturity date to December 31, 2019; c) reduction of principal to P2,800,000 and d)
    reduction of the interest rate to 9%.

    a) Impairment loss in 2016


    b) Receivable balance reported in the December 31, 2017 balance sheet
    c) Interest income for 2018

    SAMPLE PROBLEM 3

    Vision Bank loaned Jarvis Company P4,000,000 on January 1, 2014. The terms of the
    loan were payment in full on January 1, 2017 plus annual interest payment at 12%.
    The interest payment was made as scheduled on January 1, 2015. However, due to
    financial setbacks, Jarvis Company was unable to make its 2016 interest payment.
    Vision Bank considers the loan impaired and projects the cash flows from the loan
    on December 31, 2016. Vision bank accrued the interest at December 31, 2015, but
    did not continue to accrue interest for 2016 due to the impairment of the loan. The
    projected cash flows were:

    December 31 2016 2017 2018 2019


    500,000 800,000 1,200,000 1,500,000

    The present value of 1 @ 12% is as


    follows:
    Three
    One period Two periods periods Four periods
    0.89 0.80 0.71 0.64

    a) The loan impairment loss on December 31, 2016


    b) The interest income to be reported by Vision Bank
    in 2017

    SAMPLE PROBLEM 4

    On January 1, 2020, Durable Bank has a loan receivable of P4,000,000 from a


    borrower that it is carrying at face value and is due on December 31, 2024. Interest
    on the loan is payable at 9% each December 31.
    The borrower paid the interest due on December 31, 2020 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 principal payment.

    Prepare the necessary journal entries.

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