Origination Costs and Fees: Exercises

EXERCISES
Origination costs and fees

1. On January 1, 20x1, ABC Bank extended a 12%, ₱1,000,000 loan to XYZ, Inc.
Principal is due on January 1, 20x5 but interests are due annually every January 1.
ABC Bank incurred direct loan origination costs of ₱88,394 and indirect loan origination
costs of ₱18,000. In addition, ABC Bank charged XYZ a 2.5-point nonrefundable loan
origination fee. How much is the interest income in 20x2?
a. 104,973 b. 105,364 c. 106,339 d. 136,661
“Day 1” difference
Use the following information for the next two questions:
On January 1, 20x1, ABC Co. extended a ₱500,000, zero-interest loan to one of its
directors. The loan matures in lump sum on January 1, 20x5. The prevailing interest
rate for this type of loan is 12%.
Solution:
The initial carrying amount of the loan is computed as follows:
Principal amount 1,000,000
Direct origination cost 88,394
Origination fee (1,000,000 x 2.5%) (25,000)
Initial carrying amount of loan receivable 1,063,394
The effective interest is computed as follows:

We know that there is premium because the initial carrying amount of the financial
instrument is more than the face amount. Accordingly, the effective interest rate must
be less than the nominal rate of 12%. Using trial and error, let us try 10%.
Future cash flows x PV factor @ x% = Present value of note

First trial (using 10%):
(1,000,000 X PV of 1 @10%, n=3) + (120,000 x PV of ordinary annuity @12%, n=3) =
1,063,394
(1,000,000 x 0.68301) + (120,000 x 3.16987) = 1,063,394
(683,010 + 380,384) = 1,063,394 equals 1,063,394
Conclusion: The effective interest rate is 10%.
Amortization Table
COLLECTION
DATE S INTEREST INCOME AMORTIZATION PRESENT VALUE
1/1/X1 1,063,394.00
1/1/X2 120,000.00 106,339.00 13,661.00 1,049,733.00
1/1/X3 120,000.00 104,973.00
1/1/X4 120,000.00
1/1/X5 120,000.00
2. If the loan proceeds extended to the director is equal to the present value of the
loan receivable, the net effect of the loan to ABC’s 20x1 profit (loss) is
a. (182,240) b. (144,109) c. 38,131 d. 0
3. If the loan proceeds extended to the director is equal to the face amount of the
loan receivable, the net effect of the loan to ABC’s 20x1 profit (loss) is
a. (182,240) b. (144,109) c. 38,131 d. 0
Impairment of receivable
On January 1, 20x1, ABC Bank extended a ₱900,000 loan to XYZ, Inc. Principal is due
on December 31, 20x5 but 12% interest is due annually starting December 31, 20x1.
On December 31, 20x3, XYZ, Inc. was delinquent and it was ascertained that the loan is
impaired. ABC Bank assessed that interests accruing on the loan will not be collected;
however, the principal is expected to be received in three equal annual installments
starting on December 31, 20x4. Accrued interest receivable on December 31, 20x3
amounted to ₱100,000. The current market rate on December 31, 20x3 is 14%.
4. How much is the balance of allowance for impairment loss on December 31,
20x3 immediately after impairment testing?
a. 279,460 b. 303,510 c. 203,510 d. 179,460
5. How much is the interest income in 20x5?

a. 86,465 b. 60,481 c. 60,841 d. 0
Interest not accrued because of loss event

On January 1, 20x1, ABC Co. received a ₱1,000,000 note receivable from XYZ, Inc.
Principal payments of ₱200,000 and interest at 12% are due annually at the end of each
year for 5 years. The first payment starts on December 31, 20x1.
XYZ, Inc. made the required payments during 20x1 and 20x2. However, during 20x3
XYZ, Inc. began to experience financial difficulties, requiring ABC Co. to reassess the
collectability of the note. Because of the loss event, ABC Co. did not accrue the interest
on December 31, 20x3. The current rate of interest on December 31, 20x3 is 10%. ABC
Co. made the following cash flow projections on December 31, 20x3:
Date of expected receipt Amount of cash flow
January 1, 20x4 200,000

January 1, 20x5 150,000
January 1, 20x6 150,000
6. How much is the impairment loss recognized in 20x3?
a. 146,492 b. 195,082 c. 139,669 d. 181,518
7. How much is the interest income in 20x4?

a. 54,421 b. 30,421 c. 16,071 d. 0
Reversal of impairment loss

8. On January 1, 20x1, ABC Bank extended a 3-year, 12%, ₱1,000,000 loan to
XYZ, Inc. at a price that yields an effective interest rate of 10%. Principal is due at
maturity but interest is due annually every December 31.
On December 31, 20x1, XYZ was delinquent and it was ascertained that the loan was
impaired. The loan was restructured as follows:
• Only the principal amount of ₱1,000,000 shall be collected from the loan. This is
due on December 31, 20x3.
• ABC Co. waived the collection of interest.
On December 31, 20x2, XYZ’s credit rating has improved and the loan was again
restructured as follows:
• Aside from the principal amount of ₱1,000,000, which is due on December 31,
20x3, a 14% interest will also be collected.
• The new terms shall be applied prospectively.
How much is the gain on impairment reversal on December 31, 20x2? (Do not round-off
present value factors)
a. 109,091 b. 112,561 c. 134,341 d. 141,323
Evaluation of transfers
Use the following information for the next four questions:
ABC Co. transferred loans receivables with carrying amount of ₱900,000 and fair value
of ₱1,000,000 to XYZ, Inc. for cash amounting to ₱1,000,000.
9. If ABC Co. transfers substantially all the risks and rewards of ownership of the
loans receivable, how much of the transferred receivables is derecognized?
a. 1,000,000 b. 900,000 c. 100,000 d. 0
10. If ABC Co. is obligated to repurchase the transferred loans at a future date for
the fair market value of the instrument at repurchase date plus 10% interest, how much
of the transferred receivables is derecognized?
a. 1,000,000 b. 900,000 c. 100,000 d. 0
11. If ABC Co. is obligated under the terms of the transfer to repurchase any
individual loan but the aggregate amount of loans that could be repurchased could not
exceed ₱100,000, how much of the transferred receivables is retained in the books and
not derecognized?
a. 1,000,000 b. 900,000 c. 100,000 d. 0
12. If ABC Co. retains only a right of first refusal to repurchase the transferred asset
at fair value if XYZ, Inc. subsequently sells it, how much of the transferred receivables is
derecognized?
a. 1,000,000 b. 900,000 c. 100,000 d. 0
Transfer of financial asset

Fact pattern
13. ABC Co. transfers loans receivable with a fair value of ₱500,000 and carrying
amount of ₱420,000. ABC Co. obtains an option to purchase similar loans and assumes
a recourse obligation to repurchase similar loans. ABC Co. also agrees to provide a
floating rate of interest to the transferee company. The assets and liabilities received as
consideration for the transfer are listed below:
Assets received & liabilities assumed Fair values
Cash proceeds 250,000
Interest rate swap 120,000
Call option 60,000
Recourse obligation 120,000
How much is the gain (loss) on the derecognition of the financial asset?
a. 30,000 b. 7,500 c. (110,000) d. (135,000)
Servicing of a financial asset

14. Use the information in the immediately preceding problem except that ABC Co.
agreed to service the loans without explicitly stating the compensation. The fair value of
the service is ₱25,000.
How much is the gain (loss) on the derecognition of the financial asset?
a. 30,000 b. 7,500 c. (110,000) d. (135,000)
Assignment
15. On March 1, 20x1, ABC Co. assigned its ₱1,000,000 accounts receivable to
Piggy Bank in exchange for a 2-month, 12%, loan equal to 75% of the assigned
receivables. ABC Co. received the loan proceeds after a 2% deduction for service fee
based on the assigned notes. During March, ₱500,000 were collected from the
receivables. Sales returns and discounts amounted to ₱150,000. How much net cash is
received from the assignment transaction on March 1, 20x1?
a. 735,000 b. 730,000 c. 1,230,000 d. 1,235,000
Factoring: Without recourse

The next three questions are based on the following information:
Fact pattern
ABC Co. factored ₱100,000 accounts receivable to XYZ Financing Corp. on a without
recourse basis on January 1, 20x1. XYZ charged a 4% service fee and retained a 10%
holdback to cover expected sales returns. In addition, XYZ charged a 12% interest
computed on a weighted average time to maturity of the receivables of 73 days based
on 365 days.
16. How much proceeds is received from the factoring on January 1, 20x1?
a. 100,320 b. 85,600 c. 83,600 d. 88,300
Factoring: With recourse

17. How much is the cost of factoring assuming all of the receivables have been
collected?
a. 6,400 b. 2,400 c. 16,400 d. 12,400
18. Use the same information in the preceding illustration except that ABC Co.
factored the receivables on a with recourse basis. ABC Co. determines that the
recourse obligation has a fair value of ₱3,000. How much is the loss on sale of
receivables recognized on January 1, 20x1 assuming the factoring was made on a
casual basis?
a. 3,000 b. 9,400 c. 19,400 d. 6,400
Discounting - Without recourse

19. On October 1, 20x1, ABC Co. discounted a ₱600,000, one-year, 12% note,
received from a customer on January 1, 20x1, with a bank at 14% on a without recourse
basis. How much is the loss on discounting?
a. 4,960 b. 5,250 c. 4,690 d. 5,520
Dishonored note
20. On July 1, 20x1, ABC Co. discounted an ₱800,000, 90-day, 12% note, received
from a customer on June 1, 20x1, with a bank at 16% on with recourse basis. The
discounting is treated as conditional sale. The bank uses 365 days per year in
computing for discounts. On August 30, 20x1 (maturity date), the maker of the note
defaulted and the bank charged ABC Co. the maturity value of the note plus a ₱3,000
protest fee. How much is transferred to accounts receivable due to the dishonor and
before impairment testing?
a. 826,671 b. 823,671 c. 827,000 d. 862,671
Discounting of “own” note

21. On July 1, 20x1, ABC Co. discounted its own note of ₱200,000 to a bank at 10%
for one year. How much was the net proceeds received by ABC from the transaction?
a. 180,000 b. 190,000 c. 200,000 d. 0

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EXERCISES

Origination costs and fees

The effective interest is computed as follows:

Future cash flows x PV factor @ x% = Present value of note

1/1/X2 120,000.00 106,339.00 13,661.00 1,049,733.00

1/1/X3 120,000.00 104,973.00

5. How much is the interest income in 20x5?

Interest not accrued because of loss event

January 1, 20x4 200,000

7. How much is the interest income in 20x4?

Reversal of impairment loss

Transfer of financial asset

Servicing of a financial asset

Factoring: Without recourse

Factoring: With recourse

Discounting - Without recourse

Discounting of “own” note

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