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On January 1, 2020, Empress Bank granted a loan to a borrower. The interest on the...

On January 1, 2020, Empress Bank granted a loan to a borrower. The interest on the loan is 10% payable annually starting on December 31, 2019. The loan matures in three years on December 31, 2022. Principal amount 5,000,000 Direct origination cost incurred 457,500 Origination fee charged against the borrower 200,000 After considering the origination fee charged against the borrower and the direct origination cost incurred, the effective rate on the loan is 8%.

Determine the carrying amount of the loan on January 1, 2020.

Prepare journal entries for January 1, 2020.

Prepare journal entry for receipt of interest on December 31, 2020.

Prepare journal entry for amortization of direct origination cost in 2021.

Prepare journal entry for receipt of payment of loan in 2022.

Solutions

Expert Solution

Carrying value of the loan on Jan 1, 2020 =
5000000+457500-200000=
5257500
Effective interest rate amortisation of origination costs against interest income
Date Coupon amt. Interest income Origination fees amortised Face value of loan Origination fee bal. Loan bal.
1 2=5*10% 3=Prev.7*8% 4=3-2 5=FV 6=Prev.6-Current 4 7=5+6
31-Dec-20 5000000 257500 5257500
31-Dec-20 500000 420600 -79400 5000000 178100 5178100
31-Dec-21 500000 414248 -85752 5000000 92348 5092348
31-Dec-22 500000 407388 -92612 5000000 -264.2 4999736
5000000
Difference may be due to rounding -off of effective interest rate
Books of Empress Bank
Journal entries for January 1, 2020 Debit Credit
Loans receivable 5000000
Direct origination costs to be amortised 457500
Cash 5257500
Borrower reimbursement of origination fee 200000
Journal entry for receipt of interest & amortisation of direct origination fees on December 31, 2020.
Cash(5000000*10%) 500000
Interest income(5000000+257500)*8% 420600
Origination fees to be amortised(Bal.fig.) 79400
Journal entry for receipt of interest & amortisation of direct origination fees on December 31, 2021
Cash(5000000*10%) 500000
Interest income(5000000+(257500-79400))*8% 414248
Origination fees to be amortised(Bal.fig.) 85752
Journal entry for receipt of payment of loan in 2022.
Cash(Loan+coupon interest) 5500000
Interest income(5000000+(257500-79400-85752))*8% 407388
Origination fees to be amortised(Bal.fig.) 92612
Loans receivable 5000000

ekkarill92 answered 2 years ago
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