LOANS RECEIVABLE

A financial asset arising from loan granted by a bank or other financial institution to a borrower or client.

INITIAL MEASUREMENT
FAIR VALUE PLUS TRANSACTION COST
FAIR VALUE = TRANSACTION PRICE

TRANSACTION COST = DIRECT ORIGINATION COST

*Indirect Origination Cost are treated as outright expense

SUBSEQUENT MEASUREMENT
AMORTIZED COST USING EFFECTIVE INTEREST METHOD

The fees charged by the bank against the borrower for the creation of the loan are known as “ORIGINATION FEES”. They m
activities such as evaluating the borrower’s financial condition, evaluating guarantees, collateral and other security, negoti
preparing and processing documents and closing the loan transaction.

The ORIGINATION FEES RECEIVED FROM BORROWER are recognized as UNEARNED INTEREST INCOME and AMORTIZED OVER
origination fees are NOT CHARGEABLE against the borrower, they are known as ”DIRECT ORIGINATION COSTS.” The direct
and also amortized over the life of the loan. Preferably, the direct origination costs are offset directly against any unearned or

NOTE: The EFFECTIVE RATE is computed through “Trial and Error” or “Interpolation” approach.

Higher Base Rate Effective Rate Lower Base Rate

PV at HBR (PVH) PV at Initial Mesurement (PVIM) PV at LBR (PVL)

Effective Rate = LBR + [(HBR - LBR) X [(PVIM-PVL)/(PVL - PVH)]

IMPAIRMENT OF LOAN
PFRS 9, paragraph 5.5.1, provides that an entity shall recognize a loss allowance for expected credit losses on
amortized cost

Paragraph 5.5.3 provides that an entity shall measure the loss allowance for a financial instrument at an amount e
credit losses if the credit risk on the finanicial instrument has increased significantly since initial recognition.

Computation of impairment loss

Carrying Value of the Loan (Face Value + Accrued Interest, if any)
*Present Value of future cash flows
Impairment loss

*Future cash flows are discounted using the original effective interest of the loan.
Entry Loan Impairment Loss
Accrued Interest Receivable, if any.
Allowance for loan impairment
 “ORIGINATION FEES”. They may include compensation for
eral and other security, negotiating the terms of the loan,

COME and AMORTIZED OVER THE LIFE OF THE LOAN. If the

INATION COSTS.” The direct origination costs are deferred
rectly against any unearned origination fees received.

Transaction Price
+ DOC
- DOF
PV at Initial Measurement

for expected credit losses on financial asset measured at

ial instrument at an amount equal to the lifetime expected

nce initial recognition.

P X,XXX,XXX
X,XXX,XXX
XXX,XXX

XXX,XXX
XXX,XXX
XXX,XXX
Banko Mayaman granted a loan to Taong Mahirap Corporation on April 1, 2020. The interest on the loan is 10% payable annua
2021. The loan matures in 3 years on April 1, 2023.

Principal amount 5,000,000.00

Direct origination cost incurred 100,000.00
Indirect origination cost incurred 50,000.00
Direct origination fees 340,183.00

After considering the fees received from Taong Mahirap and the direct origination cost incurred, the effective rate of the loan
Prepare the Journal Entries for the year 2020 - 2021 and 2023
1/4/2020 Loans Receivable 5,000,000.00
Cash

Unearned Interest Income 100,000.00

Cash

Cash 340,183.00
Unearned Interest Income

or compound entry
Loans Receivable 5,000,000.00
Unearned Interest Income
Cash
Principal 5,000,000.00
Direct origination cost incurred 100,000.00
Direct origination fees - 340,183.00
Present Value of loan at initial measurement 4,759,817.00

Face Value > PV at Initial measurement = Effective Rate > Nominal Rate
Face Value < PV at Initial Measurement = Effective Rate < Nominal Rate

12/31/20 Accrued Interest Receivable 375,000.00

Interest Income (5M X 10% 9/12)

Unearned Interest Income 53,383.53

Interest Income (4,759,817 X 12% -500,000) X 9/12
Interest Interest Carrying
Date Received Income Amortization Value
1/4/2020 4,759,817.00
1/4/2021 500,000.00 571,178.04 - 71,178.04 4,830,995.04
1/4/2022 500,000.00 579,719.40 - 79,719.40 4,910,714.44
1/4/2023 500,000.00 589,285.73 - 89,285.73 5,000,000.18

1/1/2021 Interest Income 375,000.00

Accrued Interest Receivable

1/4/2021 Cash 500,000.00

 Interest Income

Unearned Interest Income 17,794.51

Interest Income

12/31/21 Accrued Interest Receivable 375,000.00

Interest Income

Unearned Interest Income 59,789.55

Interest Income
T-Account Method
375,000.00

Using the amortization table

Jan - Mar 2021 (571,178.04 X 3/12)
Apr - Dec 2021 (579,719.04 X 9/12)
Interest Income for 2021

1/1/2023 Interest Income 375,000.00

Accrued Interest Receivable

1/4/2023 Cash 5,500,000.00

Loans Receivable
Interest Income

Unearned Interest Income 22,321.43

Interest Income
the loan is 10% payable annually starting April 1,

To compute for the effective rate at 11% Present

Future Cash Flows PVF/PVAF Value
Principal 5,000,000.00 0.731191 3,655,956.91
Interest 500,000.00 2.443715 1,221,857.36
4,877,814.26

, the effective rate of the loan is 12%. Year Cash Flows

0 - 4,759,817.00
1 500,000.00
5,000,000.00 2 500,000.00
3 5,500,000.00
12.00%
100,000.00

340,183.00

240,183.00
4,759,817.00

minal Rate
minal Rate

375,000.00

53,383.53

375,000.00
 500,000.00

17,794.51

375,000.00

59,789.55
ccount Method
500,000.00
17,794.51
375,000.00
59,789.55
952,584.06
- 375,000.00
577,584.06

142,794.51
434,789.55
577,584.06

375,000.00

5,000,000.00
500,000.00

22,321.43
 at 12% Present
PVF/PVAF Value
0.71178 3,558,901.24
2.401831 1,200,915.63
4,759,816.87

Outflow
Inflow
Inflow
Inflow
Banko Mayaman granted a loan to Taong Mahirap Corporation on April 1, 2020. The P500,000 of principal plus interest on t
annually starting April 1, 2021.

Principal amount 2,000,000.00

Direct origination cost incurred 100,000.00
Indirect origination cost incurred 50,000.00
Direct origination fees 79,065.00

After considering the fees received from Taong Mahirap and the direct origination cost incurred, the effective rate of the loan
Prepare the journal entries for the year 2020-2021
1/4/2020 Loans Receivable 2,000,000.00
Direct Origination Costs 20,935.00
Cash
Principal 2,000,000.00
DOC 100,000.00
DOF - 79,065.00
PV at Initial Measurement 2,020,935.00

12/31/20 Accrued Interest Receivable 150,000.00

Interest Income

Interest Income 6,008.38

Direct Origination Costs
Period Cash Received Interest
From To Principal Interest Income Amortization
1/4/2020
1/4/2020 1/4/2021 500,000.00 200,000.00 191,988.83 8,011.17
1/4/2021 1/4/2022 500,000.00 150,000.00 143,727.76 6,272.24
1/4/2022 1/4/2023 500,000.00 100,000.00 95,631.90 4,368.10
1/4/2023 1/4/2024 500,000.00 50,000.00 47,716.93 2,283.07

1/1/2021 Interest Income 150,000.00

Accrued Interest Receivable

1/4/2021 Cash 700,000.00

Loans Receivable
Interest Income

Interest Income 2,002.79

Direct Origination Costs

12/31/21 Accrued Interest Receivable 112,500.00

Interest Income

Interest Income 4,704.18

Direct Origination Costs
principal plus interest on the loan of 10% are payable

Future Cash flows

Year Principal Interest Total
1 500,000.00 200,000.00 700,000.00
2 500,000.00 150,000.00 650,000.00
3 500,000.00 100,000.00 600,000.00
4 500,000.00 50,000.00 550,000.00
e effective rate of the loan is 9.5%.

2,020,935.00

150,000.00

6,008.38
Carrying
Value
2,020,935.00 Interest Income
1,512,923.83 for 2022
1,006,651.59 3 mos 35,931.94
502,283.49 9 mos 71,723.93
0.42 107,655.87

150,000.00

500,000.00
200,000.00

2,002.79

112,500.00

4,704.18
LBR Effective Rate HBR
at 9% Present ? at 10% Present
PVF Value PVF Value
0.917431 642,201.83 0.909091 636,363.64
0.841680 547,092.00 0.826446 537,190.08
0.772183 463,310.09 0.751315 450,788.88
0.708425 389,633.87 0.683013 375,657.40
2,042,237.78 2,020,935.00 2,000,000.00
21,302.78
42,237.78
Effective Rate = LBR + [(HBR - LBR) X [(PVL-PVIM)/(PVL - PVH)]
9% + 1% ( 21,302.78 / 42,237.78 9.50%

Year Cash Flows

0 - 2,020,935.00
1 700,000.00
2 650,000.00
3 600,000.00
4 550,000.00
9.50%
Banko Mayaman granted a loan to Taong Mahirap Corporation on April 1, 2020. The loan was discounted at 10% interest an
equal annual installment of P500,000 starting April 1, 2021.

Principal amount 2,000,000.00

Direct origination cost incurred 60,000.00
Indirect origination cost incurred 5,000.00
Direct origination fees ?

After considering the fees received from Taong Mahirap and the direct origination cost incurred, the effective rate of the loan
Installment Payment 500,000.00
PVAF (1 - 1.10^-4) / .10 3.169865
Transaction Price 1,584,932.72
Direct origination cost incurred 60,000.00
Direct origination fees - 110,125.82
PV at Initial Measurement
Installment Payment 500,000.00
PVAF at 11.5% 3.0696 1,534,806.90

1/4/2020 Loans Receivable 2,000,000.00

Cash 1,534,806.90
Unearned Interest Income 465,193.10

12/31/20 Unearned Interest Income 132,377.10

Interest Income 132,377.10

Annual Interest Principal Carrying

Date Installment Income Payment Value
1/4/2020 1,534,806.90
1/4/2021 500,000.00 176,502.79 323,497.21 1,211,309.69
1/4/2022 500,000.00 139,300.61 360,699.39 850,610.31
1/4/2023 500,000.00 97,820.19 402,179.81 448,430.49
1/4/2024 500,000.00 51,569.51 448,430.49 -

1/4/2021 Cash 500,000.00

Loans Receivable 500,000.00

Unearned Interest Income 44,125.70

Interest Income 44,125.70

12/31/21 Unearned Interest Income 104,475.46

Interest Income 104,475.46
counted at 10% interest and payable in four

e effective rate of the loan is 11.5%.

LR 2,000,000.00
Cash 1,584,932.72
UII 415,067.28

UII 60,000.00
Cash 60,000.00

Cash 110,125.82
UII 110,125.82
Global bank loaned P9,000,000 to a borrower on January 1, 2018. The terms of the loan were payment in full o
2023 plus annual interest of 12%.

The interest payment was made as scheduled on January 1, 2019. However, due to financial setbacks, the borrower
to make the 2020 interest payment.

The bank considered the loan impaired and projected the cash flows from the loan on December 31, 2020.

The bank has accrued the interest on December 31, 2019, but did not continue to accrue interest for 2020
impairment of loan. The projected cash flows are:
Date of Cash Flow Amount projected on December 31, 2020
Dec 31, 2021 1,500,000.00
Dec 31, 2022 2,000,000.00
Dec 31, 2023 2,500,000.00
Dec 31, 2024 3,000,000.00

Required:
1) Impairment Loss for 2020
2) Interest Income for 2021
3) Carrying Amount of Loans receivable on December 31, 2021

Carrying Value of Loan

Principal 9,000,000.00
Accrued Interest 1,080,000.00
Less Present value of future cash flows
Dec 31, 2021 1,500,000.00 0.892857143 1,339,285.71
Dec 31, 2022 2,000,000.00 0.797193878 1,594,387.76
Dec 31, 2023 2,500,000.00 0.711780248 1,779,450.62
Dec 31, 2024 3,000,000.00 0.635518078 1,906,554.24
Loan impairment loss

Interest Income 2021 6,619,678.32 X 12%

Carrying Amount of Loans receivable on December 31, 2021

6,619,678.32 X 1.12% - 1,500,000

Date Collection Interest Principal

12/31/20
12/31/21 1,500,000.00 794,361.40 705,638.60
12/31/22 2,000,000.00 709684.7668 1,290,315.23
12/31/23 2,500,000.00 554846.9388 1,945,153.06
12/31/24 3,000,000.00 321428.5714 2,678,571.43
n were payment in full on January 1,

ial setbacks, the borrower was unable

cember 31, 2020.

accrue interest for 2020 due to the

on December 31, 2020

Loan impairment loss 3,460,321.68

10,080,000.00 Accured Interest Receivable 1,080,000.00
Allowance for loan impairment 2,380,321.68

LR 9,000,000.00
Allow. For Imp. 2,380,321.68
6,619,678.32 new carrying value of the loan 12/31/20 6,619,678.32
3,460,321.68

794,361.40

5,914,039.72

Carrying Value
6,619,678.32
5,914,039.72
4,623,724.49
2,678,571.43
-
DISCOUNTING OF NOTE RECEIVABLE

-> When a note is negotiable, the payee may obtain cash before maturity date by discounting the note at a bank or oth
financing company. To discount the note, legally the payee who must endorse it, becomes an endorser and the bank becom
an endorsee. (The endorser who writes his one’s own name at the back of the note thus transferring full legal title of the no
to another party called the endorsee effects ENDORSEMENT.)

-> Endorsement with recourse means that the endorser shall pay the endorsee if the maker dishonors the note. If not indicat
endorsement is assumed to be with recourse.

-> Endorsement without recourse means that the endorser avoids future liability even if the maker refuses to pay the endors
on the date of maturity.

TERMS RELATED TO
-> NET PROCEEDS DISCOUNTING
refer OF NOTE
to the discounted value of the note received by the endorser from the endorsee.

NET PROCEEDS = MATURITY VALUE – DISCOUNT

-> MATURITY VALUE is the amount due on the note at the date of maturity.
MATURITY VALUE = PRINCIPAL + INTEREST
-> MATURITY DATE is the date on which the note should be paid.
-> PRINCIPAL is the amount appearing on the face of the note. It is also known as FACE VALUE.
-> INTEREST is the amount of interest for the full term of the note.
INTEREST = PRINCIPAL x RATE x TIME
-> INTEREST RATE is the rate appearing on the face of the note.

-> TIME is the period within which interest shall accrue. It refers to the entire or full period that is from date of note to matur
date for discounting purposes.
-> DISCOUNT is the amount of interest deducted by the bank in advance.
DISCOUNT = MATURITY VALUE x DISCOUNT RATE x DISCOUNT PERIOD

-> DISCOUNT RATE is the rate used by the bank in computing the discount. If no discount rate is given, the interest rate is saf
assumed as the discount rate.
-> DISCOUNT PERIOD is the period of time from date of discounting to maturity date. It is the unexpired term of the note.
DISCOUNT PERIOD = TERM OF NOTE – EXPIRED PORTION UP TO THE DATE OF DISCOUNTING
ng the note at a bank or other
endorser and the bank becomes
ferring full legal title of the note

onors the note. If not indicated,

aker refuses to pay the endorsee

ndorsee.

is from date of note to maturity

s given, the interest rate is safely

expired term of the note.

OF DISCOUNTING
On January 1, the entity sold merchandise for P500,000 accepting a note for P500,
Notes Receivable 500,000.00
Sales

March 1, the entity discounted the note to a local bank at 15%.

Discounting w/o recourse

Cash 503,500.00
Loss on Notes Receivable Discounting 6,500.00
Notes Receivable
Interest Income

Principal
Interest at 12% (500,000 X 12% X 6/12)
Maturity Value
Discount at 15% for 4 months (530,000 X 15% X 4/12)
Net Proceeds
Less Carrying Value
Principal 500,000.00
Interest (500,000 X 12% X 2/12 10,000.00
Loss on Notes Receivable Discounting

Assuming on July 1, the customer paid the bank in full.

No entry

With Recourse
Assuming on July 1, the customer dishonored the notes and the bank charges t
protest of P10,000.

Accounts Receivable MV + Protest Fee

Cash
Assume further that on August 1, the cutomer paid the company for the amount o

Cash
Accounts Receivable
Interest Income (540,000 X 12% X 1/12)

Solution to Mythical Company

Notes Receivable
Accounts Receivable

Cash
Loss on Notes Receivable Discounted
Notes Receivable - Discounted
Interest Income

MV (500,000 + (500,000 X 12% X 60/360))

Discount @14% for 45 days
Net Proceeds
Carrying Value of Notes
Principal
Interest (500,000 X 12% X 15/360)
Loss on Notes Receivable Discounted

Notes Receivable
Accounts Receivable

Cash
Loss on Notes Receivable Discounted
Notes Receivable - Discounted

MV
Discount (1M X 12% X 15/360)
Net Proceeds

Notes Receivable
Accrued Interest Receivable
Accounts Receivable

Accounts Receivable
Cash 510,000 + 20,000

Notes Receivable - Discounted

Notes Receivable

Notes Receivable
Sales

Cash
Accounts Receivable
Interest Income (530,000 X 12% X 15/360)
P500,000 accepting a note for P500,000 for six months with interest of 12% to be paid at matu

500,000.00

ocal bank at 15%.

W/ recourse - Conditional Sale

Cash
Loss on Notes Receivable Discounting
500,000.00 Notes Receivable -Discounted
10,000.00 Interest Income

500,000.00
30,000.00
530,000.00
26,500.00
503,500.00

510,000.00
(6,500.00)

Notes Receivable -Discounted

Notes Receivable

d the notes and the bank charges the company for the

540,000.00
 Notes Receivable -Discounted
Notes Receivable

paid the company for the amount owed plus interest.

545,400.00

500,000.00
500,000.00

501,075.00
1,425.00
500,000.00
2,500.00

% X 60/360)) 510,000.00
8,925.00
501,075.00

500,000.00
2,500.00 502,500.00
(1,425.00)

1,000,000.00
1,000,000.00

995,000.00
 5,000.00
1,000,000.00

1,000,000.00
5,000.00
995,000.00

1,500,000.00
4,500.00
1,504,500.00

530,000.00
530,000.00

500,000.00
500,000.00

800,000.00
800,000.00

532,650.00
530,000.00
% X 15/360) 2,650.00
nterest of 12% to be paid at maturity.

Conditional Sale W/ recourse - Secured Borrowing

Cash
Receivable Discounting Interest Expense
es Receivable -Discounted Liability for Notes Receivable Discounted
erest Income Interest Income

ble -Discounted Liability for Notes Receivable Discounted

es Receivable Notes Receivable

Same
540,000.00 Same
ble -Discounted Liability for Notes Receivable Discounted
es Receivable Notes Receivable

540,000.00
5,400.00
26.00 A
31.00 M
3.00 J Due Date

18.00 J Payment Date

15.00
eivable Discounted