Loans Receivable

LOAN RECEIVABLE

A 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.

MEASUREMENT

Initial Measurement : Fair value plus transaction costs that are directly attributable to grant a loan.
The fair value is normally the transaction price, or the amount of the loan granted.

Direct origination costs should be included in the initial measurement of the loan receivable

INDIRECT COST- expense - ignore-

Subsequent Measurement

PFRS 9, paragraph 4.1.2, 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.

Accordingly, a loan receivable is subsequently measured at amortized cost using the effective interest method.
The "amortized cost" is the amount at which the receivable 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.

ORIGINATION COSTS

Lending activities usually precede the actual disbursement of funds and generally include efforts to identify and
attract potential borrowers and to originate a loan.

The fees charged by the bank against the borrower for the creation of the loan are known as "origination fees".

Origination fees include 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.

TREATMENT OF ORIGINATION COSTS

The origination fees received from borrower are recognized as unearned interest income and amortized over
the term of the loan.

If the origination fees are not chargeable against the borrower, the fees are known as "direct origination

Essay Questions – Loans Receivable Page 1

 Loans Receivable

costs".

The direct origination costs are deferred and also amortized over the term of the loan.
Preferably, the direct origination costs are offset directly against any origination fees received.

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.

Accordingly, the origination fees received and the direct origination Costs are included in the measurement of
the loan receivable.

Explain impairment of loan receivable.

PFRS 9, paragraph 5.2.2, in conjunction with PAS 39, paragraph 58, provides that an entity shall assess at
every end of reporting period whether there is objective evidence that a financial asset or group of financial
assets is impaired.

If such evidence exists, the entity shall determine and recognize the amount of any impairment loss.

Objective evidence of impairment may result from the following "loss events" occurring after the initial
recognition of the financial asset:
1. Significant financial difficulty of the issuer or obligor.
2. Breach of contract, such as default or delinquency in interest or principal payment.
3. Debt restructuring
The lender, for economic or legal reason relating to the borrower's financial difficulty, grants to the borrower
a concession that the lender would not otherwise consider.
4. Probability that the borrower will enter bankruptcy or other financial reorganization.
5. The disappearance of an active market for the financial asset because of financial difficulty.
6. Measurable decrease in the estimated future cash flows from a group of financial assets since the initial
recognition, although the decrease cannot yet be identified with the individual financial assets in the group.

Explain the measurement of impairment loss on loan receivable.

PFRS 9, paragraph 5.2.2, provides that if there is evidence that an impairment loss on loan receivable carried
at amortized cost has been incurred, the amount of the loss is measured as the "difference between the
carrying amount of the loan receivable and the present value of estimated future cash flows discounted at the
original effective rate of the loan."

The carrying amount of the loan receivable shall be reduced either directly or through the use of an allowance
account.

The amount of the impairment loss shall be recognized in profit or loss.

Essay Questions – Loans Receivable Page 2

 Loans Receivable

PROBLEMS

INITIAL

National Bank granted a 10-year loan to Abbo Company in the amount of P1,500,000 with a stated interest
rate of 6%. Payments are due monthly and are computed to be P16,650. National Bank incurred P40,000 of
direct loan origination cost and P20,000 of indirect loan origination cost. In addition, National Bank charged
Abbo Company a 4-point nonrefundable loan origination fee. (4% * 1,500,000 = 60,000)

.
1
What is the initial carrying amount of the loan receivable on the part of National Bank?
A. 1,440,000 C. 1,500,000
B. 1,480,000 D. 1,520,000

1,500,000 + 40,000 – 60,000= 1,480,000

.
2
What is the initial carrying amount of the loan payable on the part of Abbo Company?
A. 1,440,000 C. 1,500,000
B. 1,480,000 D. 1,520,000

1,500,000 – 60,000 = 1,440,000

1 .Answer is (B).
Loan receivable 1,500,000
Direct origination cost 40,000
Total 1,540,000
Origination fee received from borrower (1,500,000 x 4%) ( 60,000)
Carrying amount 1,480,000
The indirect origination cost incurred by the bank is an outright expense.

2 .Answer is (A).
Loan payable 1,500,000
Origination fee charged by the bank (60,000)
Carrying amount 1,440,000

Essay Questions – Loans Receivable Page 3

 Loans Receivable

Answer is (B).
Loan receivable 1,500,000
Direct origination cost 40,000
Total 1,540,000
Origination fee received from borrower (1,500,000 x 4%) ( 60,000)
Carrying amount 1,480,000
The indirect origination cost incurred by the bank is an outright expense.

. Answer is (A).
Loan payable 1,500,000
Origination fee charged by the bank (60,000)
Carrying amount 1,440,000

Philippine Bank granted a loan to a borrower on January 1,2014. The interest on the loan is 8% payable annually
starting December 31,2014. The loan matures in three years on December 31,2016. The data related to the loan are:
Principal amount 3,000,000
Origination fee charged against the borrower 100,000
Direct origination cost incurred 260,300
After considering the origination fee charged to the borrower and the direct origination cost incurred, the effective rate
on the loan is 6%.
3
. What is the carrying amount of the loan receivable on January 1, 2014?
A. 2,900,000 C. 3,160,300
B. 3,000,000 D. 3,260,300
4
. What is the interest income for 2014?
A. 180,000 C. 240,000

3 .Answer is (C).
Direct origination cost incurred 260,300
Origination fee received (100,000)
Net direct origination cost 160,300
Loan receivable 3,000,000
Carrying amount of loan receivable - January 1, 2014 3,160,300

4 .Answer is (B).
Interest income for 2014 (6% x 3,160,300) 189,618
Interest received for 2014 (8% x 3,000,000) 240,000
Amortization of direct origination cost 50,382

Essay Questions – Loans Receivable Page 4

 Loans Receivable

B. 189,618 D. 252,824
5
. What is the carrying amount of the loan receivable on December 31, 2014?
A. 3,000,000 C. 3,160,300
B. 3,109,918 D. 3,210,682
6
. What is the interest income for 2015?
A. 180,000 C. 240,000
B. 186,595 D. 248,793

. Answer is (C).
Direct origination cost incurred 260,300
Origination fee received (100,000)
Net direct origination cost 160,300
Loan receivable 3,000,000
Carrying amount of loan receivable - January 1, 2014 3,160,300

. Answer is (B).
Interest income for 2014 (6% x 3,160,300) 189,618
Interest received for 2014 (8% x 3,000,000) 240,000
Amortization of direct origination cost 50,382

2014 INTEREST INTEREST AMORTIZATION

INCOME- INCOME RECEIVABLE –
STATEMENT- BALANCE SHEET

EFFECTIVE RATE STATED RATE *

*PV FACE
6% * 3,160,300 8% * 3,000,000
3,160,300

5 .Answer is (B).
Loan receivable 3,000,000
Direct origination cost-12/31/2014 (160,300 - 50,382) 109,918
Carrying amount - December 31, 2014 3,109,918

6 .Answer is (B).
Interest income for 2015 (6% x 3,109,918) 186,595

Essay Questions – Loans Receivable Page 5

 Loans Receivable

189,618 240,000 50,382 3,109,918

186,595

3,000,000

. Answer is (B).
Loan receivable 3,000,000
Direct origination cost-12/31/2014 (160,300 - 50,382) 109,918
Carrying amount - December 31, 2014 3,109,918

. Answer is (B).
Interest income for 2015 (6% x 3,109,918) 186,595

Appari Bank granted a loan to a borrower on January 1,2014. The interest rate on the loan is 10% payable annually
starting December 31,2014. The loan matures in five years on December 31,2018. The data related to the loan are:
Principal amount 4,000,000
Origination fee received from borrower 350,000
Direct origination cost incurred 61,500
The effective rate on the loan after considering the direct origination cost incurred and origination fee received is
12%.
7
. What is the carrying amount of the loan receivable on January 1, 2014?
A. 3,711,500 C. 4,411,500
B. 4,000,000 D. 4,650,000
8
. What is the interest income for 2014?

7 .Answer is (A).
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 - January 1,2014 3,711,500
The origination fee may be charged against the borrower. If not, the origination fee is known as "direct
origination cost". The origination fee received from the borrower is recognized as unearned interest income to
be amortized over the term of the loan. The direct origination cost is a deferred charge and also amortized over
the term of the loan. Preferably, the two are offset against the other.

8 .Answer is (B).
Interest income for 2014 (3,711,500 x 12%) 445,380
Journal entries on December 31, 2014

Essay Questions – Loans Receivable Page 6

 Loans Receivable

A. 400,000 C. 529,380
B. 445,380 D. 558,000
.
9
What is the carrying amount of the loan receivable on December 31, 2014?
A. 3,600,000 C. 4,000,000
B. 3,756,880 D. 4,243,120

National Bank granted a loan to a borrower on January 1,2014. The interest on the loan is 10% payable annually
starting December 31, 2014. The loan matures in three years on December 31, 2016. The data related to the loan
are:
Principal amount 4,000,000
Origination fee charged against the borrower 342,100
Direct origination cost incurred 150,000
After considering the origination fee charged against the borrower and the direct origination cost incurred, the
effective rate on the loan is 12%.
10
. What is the carrying amount of the loan receivable on January 1, 2014?
A. 3,657,900 C. 4,000,000
B. 3,807,900 D. 4,150,000
11
. What is the interest income for 2014?

Cash (10% x 4,000,000) 400,000

Interest income 400,000

Unearned interest income 45,380

Interest income 45,380

Interest income 445,380

Interest received 400,000
Amortization of unearned interest income 45,380

9 .Answer is (B)
Loan receivable 4,000,000
Unearned interest income - 12/31/2014 (288,500-45,380) ( 243,120)
Carrying amount -12/31/2014 3,756,800

10 .Answer is (B).
Origination fee received 342,100
Direct origination cost incurred (150,000)
Unearned interest income 192,100

Loan receivable 4,000,000

Unearned interest income ( 192,100)
Carrying amount - January 1, 2014 3,807,900

11 .Answer is (C).

Essay Questions – Loans Receivable Page 7

 Loans Receivable

A. 380,900 C. 456,948
B. 400,000 D. 480,000

.
12
What is the carrying amount of the loan receivable on December 31, 2014?
A. 3,750,932 C. 3,864,848
B. 3,807,900 D. 4,000,000

.
13
What is the interest income for 2015?
A. 386,485 C. 463,782
B. 400,000 D. 480,000

Interest income for 2014 (12% x 3,807,900) 456,948

Interest received for 2014 (10% x 4,000,000) 400,000
Amortization of unearned interest income 56,948

12 .Answer is (C).
Loan receivable 4,000,000-
Unearned interest income - December 31, 2014
(192,100-56,948) ( 135,152)
Carrying amount - December 31, 2014 3,864,848

13 .Answer is (C).
Interest income for 2015 (12% x 3,864,848) 463,782

Essay Questions – Loans Receivable Page 8