On January 1, 2014, ABC Company, a calendar-year firm, gave a loan to XYZ Enterprises amounting to P1,000,000 and received a two-year, 12%, P1,000,000 note. The note calls for annual interest to be paid each January 2. ABC collected the interest on January, 2015 as scheduled. The company incurred origination cost amounting to P57,851, 40% of which had been charged to XYZ Enterprises. Yield rate on the loan with this arrangement was at 10%. At December 31, 2015, however, based on XYZ’s recent financial problems, ABC expects to collect only P900,000 of the amounts due. The P900,000 principal amount is expected to be collected in three equal installments on December 31, 2016, 2017 and 2018. ABC believes that 8% is the market’s assessment of the time value of money as of December 31, 2015. Requirements: 1. How much should the loans receivable be initially recognized? 2. What is the carrying value of the loans receivable as of December 31, 2014? 3. How much loss should be recognized in relation to the loan on December 31, 2015? 4. Assume that ABC Company collects the expected payments from XYZ. What entries should be made on December 31, 2016; December 31, 2017, and December 31, 2018?
On January 1, 2014, ABC Company, a calendar-year firm, gave a loan to XYZ Enterprises
amounting to P1,000,000 and received a two-year, 12%, P1,000,000 note. The note calls for
annual interest to be paid each January 2. ABC collected the interest on January, 2015
as scheduled. The company incurred origination cost amounting to P57,851, 40% of which
had been charged to XYZ Enterprises. Yield rate on the loan with this arrangement was at
10%.
At December 31, 2015, however, based on XYZ’s recent financial problems, ABC expects to
collect only P900,000 of the amounts due.
The P900,000 principal amount is expected to be collected in three equal installments on
December 31, 2016, 2017 and 2018.
ABC believes that 8% is the market’s assessment of the time value of money as of December
31, 2015.
Requirements:
1. How much should the loans receivable be initially recognized?
2. What is the carrying value of the loans receivable as of December 31, 2014?
3. How much loss should be recognized in relation to the loan on December 31, 2015?
4. Assume that ABC Company collects the expected payments from XYZ. What entries
should be made on December 31, 2016; December 31, 2017, and December 31,
2018?
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