Problem 5: On January 1, 2020 Global Bank loaned P3,000,000 to a borrower.

The contract specified that the loan had a 6 year term and a 9%
interest rate.
Interest is payable annually every December 31 and the principal
amount will be collected on December 31, 2025. Interest is collected
for 2020.
On December 31, 2020, the bank determined that the loan has a
12-month probability of default of 2% and expected to collect
only 90% of the loan.
On December 31, 2021, the bank determined that there is a
significant increase in the credit risk of the loan but no
objective evidence of impairment.
Based on the relevant information, the bank concluded that there
is a 30% probability of default over the remaining term of the
loan and it is expected that only 60% of the loan will be collected.
Interest is collected for 2021.
On December 31, 2022, the borrower was under financial
difficulty and the loan was considered impaired.
The bank agreed that only 40% of the principal will be collected
on due date. Interest is collected for 2022.
The present value of 1 at 9% is 0.65 for 5 periods, 0.71 for
four periods and 0.77 for three periods.

Required:
1. Prepare the journal entries for 2020, 2021, and 2022.
2. Compute the carrying amount of the loan receivable on
December 31, 2020., 2021, and 2022.
3. Prepare the journal entries for 2023, 2024, and 2025.

Requirement 1:
2020 Jan. 1 Loan receivable 3,000,000
Cash 3,000,000

Dec. 31 Cash 270,000

Interest income 270,000 (3,000,000 x

Carrying amount - Dec. 31, 2020 3,000,000

Less: Present value of expected cash flows
Dec. 31, 2020 (3,000,000 x 90% x 0.65) 1,755,000
Expected credit loss 1,245,000
Multiply by probability of default within
12 months
12 month expected credit loss
 Impairment Loss 24,900
Allowance for impairment loss 2

2021 Dec. 31 Cash 270,000

Interest income

Carrying amount - Dec. 31, 2020 3,000,000

Less: Present value of expected cash flows
Dec. 31, 2021 ( 3,000,000 x 60% x 0.71
Expected credit loss 1,722,000
Multiply by probability of default within 4 years
Lifetime expected credit loss
Unadjusted aloowance
Impairment Loss

Impaiement loss 491,700

Allowance for loan impairment 491,700

2022 Dec. 31 Cash 270,000

Interest income 270,000

Carrying amount - Dec. 31, 2022 3,000,000

Present value of expected cash flows - Dec. 31, 2022
(3,000,000 x 40% x 0.77
Expected credit loss
Lifetime expected loss
Impairment Loss

Impairment Loss 1,559,400

Allowance for loan impairment

Allowance for loan impairment 1,800,000

Loan receivable

Requirement 2:
2020
Loan receivable 3,000,000
Allowance for loan impairment 24,900
Net carrying amount - Dec. 31, 2020 P2,975,100

2021 Loan receivable 3,000,000

 allowance for loan impairment 516,600
Net carrying amount - Dec. 31, 2021 2,483,400

2022 Loan receivable (3,000,000 - 1,800,000) 1,200,000

Allowance for loan impairment
(2,076,000 - 1,800,000) 276,000
Net carrying amount - Ded. 31, 2022 P924,000

Requirement 3:
2023
Dec. 31 Allowance for loan impairment
Interest income ( 924,000 x 9%)

2024
Dec. 31 Allowance for loan impairment
Interest income (1,007,160 x 9%)

2025 Dec. 31 Allowance for loan impairment 102

Interes income

Cash
Loan receivable
 3,000,000

270,000 (3,000,000 x 9%)

3,000,000

0% x 0.65) 1,755,000
1,245,000

2%
24,900
 24,900
24,900

270,000

3,000,000

1,278,000
1,722,000
30%
516,600
24,900
P491,700

491,700
491,700

270,000

3,000,000

924,000
2,076,000
516,600
1,559,400

1,559,400

1,800,000

3,000,000

P2,975,100

3,000,000
 1,200,000

83,160
ncome ( 924,000 x 9%) 83,160

Loan receivable 1,200,000

90,645 Allowance for loan impairment
ncome (1,007,160 x 9%) 90,645 (276,000 - 83,160) 192,840
Net carrying amount 1,007,160
mpairment 102,195
102,195

1,200,000
1,200,000