Accounting for Impaired Loan
Receivable
Loans Receivable
Cozy Bank Loan
On January 1, 2018, Cozy Bank loaned a borrower ₱7,500,000 with the
following terms: - Payment in full on January 1, 2023 - Annual interest
payment at 12% - The first interest payment was made as scheduled on
January 1, 2019
However, due to financial setbacks, the borrower was unable to make the
2020 interest payment. As a result, the bank considered the loan impaired
and projected the cash flows from the loan on December 31, 2020.
The bank accrued the interest on December 31, 2019, but did not continue
to accrue interest for 2020 due to the impairment of the loan.
Projected Cash Flows
The projected cash flows from the loan on December 31, 2020 were as
follows:
| Date of Cash Flow | Amount Projected | | ----------------- | ---------------- | |
December 31, 2021 | ₱500,000 | | December 31, 2022 | ₱1,000,000 | |
December 31, 2023 | ₱2,000,000 | | December 31, 2024 | ₱4,000,000 |
Present Value Calculations
The present value of the loan receivable on December 31, 2020 was
calculated using the following discount factors:
Present value of 1 at 12% for one period: 0.89
Present value of 1 at 12% for two periods: 0.80
Requirement 1: Compute the Present Value of the Loan
Receivable on December 31, 2020
| Date of Cash Flow | Amount Projected | Present Value | | ----------------- |
---------------- | ------------- | | December 31, 2021 | ₱500,000 | ₱445,000 | |
December 31, 2022 | ₱1,000,000 | ₱800,000 | | December 31, 2023 |
₱2,000,000 | ₱1,420,000 | | December 31, 2024 | ₱4,000,000 | ₱2,560,000 | |
Total Present Value of Loan | | ₱5,225,000 |
•
•
