Accounting for Loans Receivable:
Effective Interest Rate and
Amortization
Loans Receivable: Empress Bank Loan
Loan Details
On January 1, 2020, Empress Bank granted a loan with the following terms:
Principal amount: $5,000,000
Interest rate: 10% per annum, payable annually on December 31
Loan maturity: 3 years, maturing on December 31, 2022
Direct origination cost incurred: $457,500
Origination fee charged against the borrower: $200,000
Effective interest rate: 8%
Carrying Amount of the Loan on January 1, 2020
The carrying amount of the loan on January 1, 2020, is calculated as follows:
Principal amount: $5,000,000 Direct origination cost incurred: $457,500
Origination fee charged against the borrower: -$200,000 Carrying amount
on January 1, 2020: $5,257,500
Amortization of Direct Origination Cost
The amortization of the direct origination cost over the life of the loan is as
follows:
| Date | Interest Received | Interest Income | | --- | --- | --- | | 31-Dec-20 |
$500,000 | $420,600 | | 31-Dec-21 | $500,000 | $414,248 | | 31-Dec-22 |
$500,000 | $407,652 |
Journal Entries
The journal entries for the loan transactions in 2020, 2021, and 2022 are as
follows:
2020
Loan receivable | $5,000,000 Cash | $5,000,000 Direct origination cost |
$457,500 Cash | $457,500 Cash | $200,000 Direct origination cost |
$200,000 Cash | $500,000 Interest income | $500,000 Interest income |
$79,400 Direct origination cost | $79,400
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