Baral, Charissa Micah I.

BSA 2 - G1
PROBLEM 5: FOR CLASSROOM DISCUSSION

Problem 5:
Origination costs and fees
On Jan. 1, 20x1, Sore Bank extended a P5,000,000, 10% loan to a borrower. The principal is
due in 4 years' time but interest is due annually every Dec. 31. Sore Bank incurred direct loan
origination costs of P261,986 and charged the borrower origination fee of 2%.

Requirement: Compute for the carrying amounts of the loan on Jan.. 1, 20x1 and
Dec. 31, 20x1, respectively.

Initial measurement:
Face Amount 5,000,000
Direct loan origination costs 261,986
Origination fees (5M x 2% -100,000
Carrying amount - 1/1/x1 5,161,986

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

First trial (using 9%):

Principal of (5,000,000 x PV of 1 @ 9%, n=4) + Interest of (500,000 x PV of ordinary annuity @ 9%, n=4) =
(5,000,000 x 0.70842521105) + (500,000 x 3.23971987722) = 5,161,986
(3,542,126 + 1,619,860) = 5,161,986 is equal to5,161,986

The effective interest rate is 9%.

INTERESTAMORTIZATION PRESENT
DATE COLLECTIONS INCOME VALUE
1/1/x1
12/31/x1 500,000 464,579 35,421 5,161,986
12/31/x2 500,000 461,391 28,609 5,087,956
12/31/x3 500,000 457,916 42,084 5,045,872
12/31/x4 500,000 454,128 45,872 5,000,000
 principal is
d direct loan

ary annuity @ 9%, n=4) = 5,161,986

Day-1 difference
On Jan 1, 20x1, Chromatic Bank extended a P2,000,000, zero interest loan
to one of its officers. The loan matures in lump sum in 4 years' time.
The officer received loan proceeds of P2,000,000. The effective interest rate is 10%.

Requirements: Provide the journal entry on Jan. 1, 20x1.

Requirement:
Initial measurement: 2M x PV of 1 @ 10%, n=4 = 1,366,027

Date Account Titles and Explanation P/R Debit Credit

Loan Receivable 2,000,000

Unrealized Loss (Day 1 difference) 633,973
Cash 2,000,000
Unearned interest 633,973
Impairment: '3-bucket' approach
On July 1, 20x1, Sunny Day Corporation recognizes a 3-year, 10%, P2,000,000 loan
receivable in exchange for cash. The principal is due at maturity but interest
is due annually every July 1. The effective interest rate on the loan is 10%.
Sunny Day makes the following estimates of risks of defaults and losses.

Risk of default in next 12 monRisk of default in months 13 to Loss that would result from default
7/1/20X1 2.50% 5.00% 800,000
12/31/20X1 3.00% 10% 700,000
12/31/20X2 1.00% 2% 500,000

At initial recognition, Sunny determines that the loan is not a purchased or originated credit-impaired
financial asset. On December 31, 20x1, Sunny determines that the increase in credit risk since
initial recognition is significant but the loan is not credit impaired. (Adapted)

Requirements: Provide the entries on the following dates: 20x1, December 31, 20x1 and December 31, 20

Requirement:
Date Account Titles and Explanation P/R Debit Credit
20x1
July 1 Loans receivable 2,000,000
Cash 2,000,000

1 Impairment loss 20,000

Loss Allowance 20,000

Equal to 12-month expected credit losses

December 31 Impairment Loss 71,000

Loss Allowance 71,000

Lifetime expected credit losses

31 Interest receivable 100,000

Interest income 100,000

20x2
December 31 Loss Allowance 86,000
Impairment gain 86,000

12-month expected credit losses

31 Interest receivable 100,000
interest income 100,000
ould result from default

d credit-impaired
dit risk since

1 and December 31, 20x2

Credit-impaired financial asset
On Dec. 31, 20x1, an entity determines that a P3,000,000, 10% loan receivable is credit-impaired. A P400
been accrued on the loan. The entity determines that it can only collect a total of P3,000,000 on the loan,
and that the cash flows will be collected in installments of P1,000,000 per year starting Dec. 31, 20x2. The

Requirements: Provide the journal entry compute for the interest income in 20x2.

Requirement:
PV of future cash flows (1M x PV ordinary annuity @10%, n 2,486,852
Carrying amount (3M principal + .4M int. receivable -3,400,000
Impairment loss -913,148

DIRECT ALLOWANCE
Dec. 31, 20x1 Dec. 31, 20x1
Impairment loss 913,148 Impairment loss
Interest receivable 400,000 Interest receivable
Loan receivable 513,148 Loan allowance

DATE COLLECTIONS INTEREST INCOME AMORTIZATION PRESENT VALUE

Dec. 31, 20x1 2,486,852
Dec. 31, 1,000,000 248,685 751,315 1,735,537
Dec. 31, 1,000,000 173,554 826,446 909,091
Dec. 31, 1,000,000 90,909 909,091 -
edit-impaired. A P400,000 interest receivable has
000,000 on the loan, inclusive of both principal and interest,
ng Dec. 31, 20x2. The current market rate on Dec. 31, 20x1 is 12%.

913,148
400,000
513,148
Evaluation of transfers of financial assets
On Nov. 14, 20x1, Athena Co. sold its P30,000 loan receivable from Zevrek Co. to Devin Bank for P28,000
requires Athena Co. to repurchase the loan at a future date for P28,000 plus interest based on the current

Requirement: Provide the journal entry on Nov. 14, 20x1.

Requirement:
Nov. 14,20x1 Cash 28,000
Liability on purchase agreement 28,000

The transfer does not qualify for derecognition because Athena Co.
is required to repurchase the transferred loan. The cash received
on the transfer is recorded as liability.
o. to Devin Bank for P28,000. The sale agreement
nterest based on the current market rate on repurchase date.
Offsetting of financial assets and financial liabilities
On December 31, 20x1, Twinkle Co. has accounts receivable from, and accounts payable to, Star, Inc. am
P180,000, respectively. Both accounts are due currently. Twinkle Co. has the legal right of offset. Howeve
accounts payable is one month longer than the accounts receivable, Twinkle Co. intends to collect first th
accounts payable at the end of the credit term.

Requirement: How much accounts receivable shall be presented in Twinkle's December 31, 20x1 stateme

Requirement:
₱200,000 – the gross amount. Offsetting is not applicable because ABC Co. does not intend to settle the a
payable simultaneously. A financial asset and a financial liability are offset and only the net amount is pre
position if the entity has both:

a. a legal right of setoff; and

b. an intention to settle the amounts on a net basis or simultaneously
nts payable to, Star, Inc. amounting to P200,000 and
egal right of offset. However, because the credit term for the
Co. intends to collect first the accounts receivable and pay the

December 31, 20x1 statement of financial position?

oes not intend to settle the accounts receivable and accounts

d only the net amount is presented in the statement of financial
Receivable financing - Pledge
On Nov. 24, 20x1, Resume Co. borrowed a P750,000, 45-day loan from a bank and pledged its receivable
collateral security. Resume Co. received the loan proceeds after deduction of P27,000 advance interest."

Requirement: Provide the journal entry on Nov. 24, 20x1.

Requirement:
Nov.24,20x1
Cash 723,000
Discount on Payabl 27,000
Loans Payable 750,000
k and pledged its receivables as
P27,000 advance interest."
Receivable financing - Assignment
Morning Co. assigned P900,000 accounts receivable to Sunday Financing Corp. as security for a P750,00
with 12% interest. Sunday charged an origination fee of 3% based on the assigned accounts. During the fi
P350,000 cash were collected on the assigned receivables, net of P560 sales returns. Morning off a P530
The collections on the assigned receivables were applied to the principal of the loan. Additional cash is pa

Requirements: Provide the journal entries under (a) notification basis and (b) non-notification basis and co
for Morning's "equity in the assigned receivable" at month-end. (Ignore the amortization of the Discount on

Requirements:
JOURNAL ENTRIES

Notification Basis Non-Notification Basis

1 Accts. receivable – assigned 900,000 1 Accts. receivable – assigne
Accounts receivable 900,000 Accounts receivable
To record the assignment To record the assignment

2 Cash 723,000 2 Cash

Discount on L/P (900M x 3%) 27,000 Discount on L/P (900M x 3
Loan payable 750,000 Loan payable
To record the receipt of loan To record the receipt of loa

3 NO ENTRY 3 Cash
To record the collections Sales Returns
Accounts Receivable
4 Allowance for bad debts 530 To record the collections
Account receivable – assigned 530
To record the write-off 4 Allowance for bad debts
Account receivable –
5 Not applicable To record the write-off
To record the remittance of collections to Sunday, plus interest
5 Loan Payable
6 Loan payable 350,000 Interest Expense
Sales returns 560 Cash
Account Receivable – assigned 350,560
Sunday Financing Corp. notifies Morning Co. of the collections

7 Interest Expense 7,500

Cash 7,500
Morning Co. pays the interest

(a) (750K x 12% x 1/12) = 7.5

 p. as security for a P750,000 loan
gned accounts. During the first month,
returns. Morning off a P530 assigned account.
e loan. Additional cash is paid for the interest accruing for the month.

on-notification basis and compute

ortization of the Discount on loan payable.")

Non-Notification Basis
Accts. receivable – assigned 900,000
Accounts receivable 900,000
To record the assignment

723,000
Discount on L/P (900M x 3%) 27,000
Loan payable 750,000
To record the receipt of loan

350,000
Sales Returns 560
Accounts Receivable-assigned 350,560
To record the collections

Allowance for bad debts 530

Account receivable – assigned 530
To record the write-off

Loan Payable 350,000

Interest Expense 7,500
Cash 357,500
Receivable financing - Factoring
Mug Co. factored P400,000 accounts receivable with Coffee Financing Corp. Under the arrangement, Mug
handle disputes concerning service, and Coffee Financing was to make the collections and handle the sal
charged 6% service fee and retained 2% to cover sales discounts.

Requirements:
a. Prepare the journal entries in Mug's and Coffee's respective books to record the factoring assuming the
made on a non-recourse basis and, as to Mug, the transaction is only a one-time event.
b. Prepare the journal entries in Mug's books assuming the factoring was made on a recourse basis and M
factoring as a regular means of financing. The recourse provision has a fair value of P7,000.

Requirement A:
Mug Co.’s books:
Cash (squeeze) 368,000
Due from Factor (2% × ₱400,000) 8,000
Loss on Sale of Receivables (6% × ₱40 24,000
Accounts Receivable 400,000

Coffee Co.’s books:

Accounts Receivable 400,000
Due to Mug 8,000
Financing Revenue 24,000
Cash 368,000

Requirement B:
Mug Co.’s books:
Cash 368,000
Due from factor 8,000
Service charge (6% × ₱400,000) 24,000
Loss on recourse obligation 7,000
Accounts Receivable 400,000
Recourse Liability 7,000
Under the arrangement, Mug was to
llections and handle the sales discounts. Coffee

d the factoring assuming the factoring was

e on a recourse basis and Mug uses

lue of P7,000.
Receivable financing - Discounting of Notes
On November 1, 20x1, Sunny Friday Co. discounted a P1,000,000, 6-month, 12% note, received from a c
on July 1, 20x1, with a bank at 16%.

Requirement: Provide the entry on Nov. 1 under each of the following scenarios: the discounting is made o
(a) without recourse basis, (b) with recourse basis - conditional sale, and (c) with recourse basis-secured b

Requirement: Requirement (A) Without r

Maturity value= Principal + Interest for the full term of the note Nov. 1,20x1
Maturity value = 1,000,000 + (1,000,000 x 12% x 6/12)
Maturity value = 1,060,000

Discount period= unexpired term (or full term – expired term)

Discount period = 6 months – 4 months from July 1 to Nov. 1
Discount period= 2 months Requirement (B) Without r
Nov. 1,20x1
Discount= Maturity value x Discount rate x Discount period
Discount = 1,060,000 x 16% x 2/12
Discount= 28,267

Net proceeds = Maturity value - Discount

Net proceeds = 1,060,000 – 28,267 Requirement (C) Without r
Net proceeds= 1,031,733 Nov. 1,20x1

Interest income= accrued interest as of date of discounting

Interest income= 1,000,000 x 12% x 4/12
Interest income= 40,000
12% note, received from a customer

s: the discounting is made on a

ith recourse basis-secured borrowing.

Requirement (A) Without recourse basis

Nov. 1,20x1 Cash (equal to net proceeds) 1,031,733
Loss on discounting (squeeze 8,267
Note receivable discounted 1,000,000
Interest income 40,000

Requirement (B) Without recourse basis - conditional sale

Nov. 1,20x1 Cash (equal to net proceeds) 1,031,733
Loss on discounting (squeeze 8,267
Note receivable discounted 1,000,000
Interest income 40,000

Requirement (C) Without recourse basis- secured borrowing

Nov. 1,20x1 Cash (equal to net proceeds) 1,031,733
Loss on discounting (squeeze 8,267
Note receivable discounted 1,000,000
Interest income 40,000