Introduction

In the previous chapter, initial and subsequent measurement of different notes

receivable has been discussed. In this lesson, we will explore how to account for origination

cost and fees related to loan receivable. Loan receivable is similar to note receivable since it

is also a claim supported by formal promise to pay a certain sum of money at specific future

dates(s) usually in the form of promissory note. Loan receivable is typically used by entities

which are involved in lending of money such as various financial institutions like banks,

financing companies, lending companies, insurance companies, pawnshops, non-bank

intermediaries like savings and loans associations, credit cooperatives and others.

Loans receivable follows the same accounting for notes receivable except that it

involves transactions cost.

Ask your parents or anyone in your house if they have availed any loan recently. Check

the documents and try to check if there are service charge on the transaction. How much is

the amount actually received? Was it the same with the amount stated on the document?

In loan transaction which are usually granted by lending firms and other credit

institutions, transaction cost is always present. Transaction cost are incremental costs that

are directly attributable to the acquisition, issue or disposal of a financial asset or financial

liability. An incremental cost is ne that would not have been incurred if the entity had not

acquired, issued or disposed of the financial instrument (PFRS 9).

Examples:

 Fees and commissions

 Transfer taxes.

 Receivables are initially recognized at fair value plus transaction

costs.

Name : ___________________ Score: ____

Section : ___________________
Subject : Intermediate Accounting 1

Class Schedule : ______________

Teacher : Joanne R. Diesca

Date : ______________

Activity

Analysis

 Direct origination costs are added to the carrying amount of a loan

receivable. Indirect origination costs are expensed when incurred.

 Origination fees are deducted from the carrying amount of a loan

receivable.

IMPAIRMENT

A. The expected credit loss model (ECL)

B. General Approach

Definition of terms

• Loss allowance – is the allowance for expected credit losses on financial

assets that are within the scope of the impairment requirements of PFRS 9.

• Expected credit losses – is the weighted average of credit losses with the

respective risks of a default occurring as the weights.

• Credit loss – is the difference between all contractual cash flows that are

due to an entity in accordance with the contract and all the cash flows that

the entity expects to receive (i.e., all cash shortfalls), discounted at the
original effective interest rate (or credit-adjusted effective interest rate for

purchased or originated credit-impaired financial assets).

• 12-month expected credit losses – The portion of lifetime expected credit

losses that represent the expected credit losses that result from default

events on a financial instrument that are possible within the 12 months after

the reporting date.

• Credit risk – The risk that one party to a financial instrument will cause a

financial loss for the other party by failing to discharge an obligation.

• Lifetime expected credit losses – The expected credit losses that result

from all possible default events over the expected life of a financial

instrument.

C. Simplified approach

 An entity shall always measure the loss allowance at amount equal to

lifetime expected credit losses for its trade receivables or contract assets

that do not contain a significant financing component.

 Examples: Provision matrix and Single loss rate

DERECOGNITION OF RECEIVABLES

• Derecognition (of a financial instrument) means the removal of a

previously recognized financial asset or financial liability from an

entity’s statement of financial position.

Financial assets are derecognized when:

a) the contractual rights to the cash flows from the financial asset expire; or

b) the financial assets are transferred and the transfer qualifies for

derecognition.

EVALUATION OF TRANSFERS OF RECEIVABLES

• Substantially transferred, the receivable is derecognized.

• Substantially retained, the receivable is not derecognized but continued to

be recognized. Any cash received from the transfer is recognized as liability.

• Partially transferred and partially retained, the portion transferred is

derecognized while the portion retained is continued to be recognized.

OFFSETTING OF FINANCIAL ASSETS AND FINANCIAL LIABILITIES

• A financial asset and a financial liability shall be offset and the net amount

presented in the statement of financial position only when both of the

following conditions are met:

a. The entity currently has a legally enforceable right to set off the

recognized amounts; and

b. The entity intends either to settle on a net basis, or to realize the asset

and settle the liability simultaneously.

Receivable financing

1. Pledge (hypothecation)

2. Assignment

a. Notification basis

b. Non-notification basis

3. Factoring

4. Discounting of notes receivable

a. NP = MV – D

b. MV = P + i

c. D = MV x Dr x Dp

d. Dr = Discount rate

e. Dp = Discount period (the unexpired term of the note)

f. Interest income = interest accrued on the expired term of the

Origination cost and fees

1. On January 1, 20x1, Sore bank extended a P5,000,000, 10% loan to a

borrower. The principal is due in 4 years’ time but interest is due annually

every Dec. 31. Sore Ban incurred direct loan origination cost of P 261,986

and charged the borrower origination fee of 2%.

Requirement: Compute for the carrying amounts of the loan on January 1,

20x1 and December 31, 20x1, respectively.

1. Solution:

Initial measurement:

Face amount 5,000,000

Direct loan origination costs 261,986

Origination fees (5M x 2%) (100,000)

Carrying amount - 1/1/x1 5,161,986

Subsequent measurement:

Future cash flows x PV factor @ x% = Present value of note

First trial (using 9%):

 Principal of (5,000,000 x PV of 1 @ 9%, n=4) + Interest of (500,000 x PV of ordinary annuity @

9%, n=4) = 5,161,986

 (5,000,000 x 0.70842521105) + (500,000 x 3.23971987722) = 5,161,986

 (3,542,126 + 1,619,860) = 5,161,986 is equal to 5,161,986

 The effective interest rate is 9%.

Date Collections Interest income Amortization Present value

1/1/x1 5,161,986

12/31/x1 500,000 464,579 35,421 5,126,565

12/31/x2 500,000 461,391 38,609 5,087,956

12/31/x4 500,000 454,128 45,872 5,000,000

Day-1 Difference

2. On January 2, 20x1, Chromatic Bank extended a P2,000,000, zero interest

loan yo one of its officers. The loan matures in lump sum in 4 years’ time.

The ooficeer received loan proceeds of P 2,000,00. The effective intrest rate

is 10%.

Requirements:

Provide the journal entry on January 1, 20x1.

Abstractionn

2. Solution:

Initial measurement: 2M x PV of 1 @ 10%, n=4 = 1,366,027

Jan.

1,

20x

Loan receivable

Unrealized loss (“Day 1” difference)

Cash

Unearned interest

2,000,000

633,973

2,000,000

633,973
Impairment: ‘3-bucket’ approach.

3. On July 1, 20x1, Sunny Day Corporation recognizws a 3-year, 10%, P

2,000,000 loan receivable in exchange for cash. The principal is due at

maturity but interest is due annually every July 1. The effective interest rate

on the loan is 10%. Sunny Day makes the following estimates of risks of

defaults and losses.

Risk of default Risl of default Loss that would

In next 12 monts in minths 13 to 36 result from default

7/01/20x1 2.5% 5.0% 800,000

12/31/20x1 3.0% 10.0% 700,000

12/31/20x2 1.0% 2.0% 500,000

At initial recognition, Sunny determines that the loan is not a purchased or

originated credit-impaired financial asset. On December 31, 20x1, Sunny

determines that the increase in credit risk since initial recognition is significant but

the loan is not credit-impaired.

Requirement s: Provide the entries on the following dates: July 1, 20x1, December

31, 20x1 and December 31, 20x2.

3. Solutions:

July 1, 20x1

July 1,

20x1

Loan receivable

Cash

2,000,000
2,000,000

July 1,

20x1

Impairment loss*

Loss allowance

20,000

20,000

* Equal to 12-month expected credit losses (2.5% x 800,000)

December 31, 20x1

Dec. 31,

20x1

Impairment loss

Loss allowance (91K – 20K)

71,000

71,000

Lifetime expected credit losses = (3.0% + 10%) x 700,000 = 91,000

Dec. 31,

20x1

Interest receivable
Interest income (2M x 10% x 6/12)**

100,000

100,000

** Interest revenue is computed on the gross carrying amount because the loan is

not credit-impaired (i.e., Stage 2 rather than Stage 3).

December 31, 20x2

Dec. 31, Loss allowance (91K – 5K) 86,000

20x2 Impairment gain 86,000

12-month expected credit losses = (1% x 500,000) = 5,000

Sunny Day Corp. reverts back to measuring expected credit losses equal to 12-

month expected credit losses because the credit risk has significantly decreased

since initial recognition. This is evidenced by the fact that the 12-month default risk

of 1% on 12/31/20x2 is lower than the 12-month default risk of 2.5% on 7/1/20x1

Dec. 31,

20x2

Interest receivable

Interest income (2M x 10% x 6/12)

100,000

100,000

4. On December 31, 20x1, an entity determines that a P3,000,000, 10% loan

receivable is credit-impaired. A P400,000 interest receivable has been

accrued on the loan. The entity determines that it can only collect a total of

P3,000,000 on the loan, inclusive of both principal and interest, and that the
cash flows will be collected in installments of 1,000,000 per year starting

December 31, 20x2. The current market rate in Dec. 31, 20x1 is 12%.

Requirements: Provide the journal entry on December 31, 20x1 and compute for

the interest income in 20x2.

4. Solution:

PV of future cash flows (1M x PV ord. ann. @10%, n=3) 2,486,852

Carrying amount (3M principal + .4M int. receivable) (3,400,000)

Impairment loss (913,148)

Direct Allowance

Dec. 31, 20x1

Impairment loss

913,148

Interest receivable

400,000

Loan receivable

513,148

Dec. 31, 20x1

Impairment loss

913,148

Interest receivable

400,000

Loss allowance

513,148

Date Collections Interest income Amortization Present value

Dec. 31, 20x2 1,000,000 248,685 751,315 1,735,537

Dec. 31, 20x3 1,000,000 173,554 826,446 909,091

Dec. 31, 20x4 1,000,000 90,909 909,091 -

Evaluation of transfers of financial Assets

5. On Nov. 14 20x1, Athena Co. sold its P30,000 loan receivable from Zevrek

Co. to Devin Bank for P28,000 . the sale agreement requires Athena Co. to

repurchase the loan at a future date for P28,000 plus interst bsed in the

current market rate on repurchase date.

Requirement: Provide the journal entry on November 14, 20x1.

5. Solution:

Nov.

14,

20x1

Cash

Liability on repurchase agreement

28,000

28,000

The transfer does not qualify for derecognition because Athena Co. is required to

repurchase the transferred loan. The cash received on the transfer is recorded as

liability.

Offsetting of financial assets and financial liabilities

6. On December 31, 20x1, Twinkle Co. has accounts receivable from, and

accounts payable to, Star Inc. amounting to P200,000 ad P180,00,

of offset. However, because the credit term for the accounts payable is one

month longer than the accounts receivable, Twinkle Co, intends to collect

first the account receivable and pay the accounts payable at the end of the

credit term.

Requirement:

How much accounts receivable shall be presented in Twinkle;s December 31,

20x1 statement of financial position?

6. Answer: ₱200,000 – the gross amount. Offsetting is not applicable because

ABC Co. does not intend to settle the accounts receivable and accounts payable

simultaneously. A financial asset and a financial liability are offset and only the

net amount is presented in the statement of financial position if the entity has

both:

a. a legal right of setoff; and

b. an intention to settle the amounts on a net basis or simultaneously

Receivable financing -Pledge

7. On November 24, 20x1, Resume Co. borrowed a P750,000, 45-day loan from

a bank and pledged its receivables as collateral security. Resume Co.

received the loan proceeds after deduction of P27,000 advance interest.

Requirement:

Provide the journal entry in November 24, 20x1.

7. Solution:

Cash 723,000

Discount on loan payable 27,000

Loans Payable 750,000

8. Morning Co. assigned P900,000 accounts receivable to Sunday Financing

Corp, as security for a P750,000 loan with 12% interest. Sunday charged an

origination fee of 3% based in the assigned accounts. During the first month,

P350,000 cash were collected on the assigned receivables, net of P560 sales

returns. Morning wrote off a P530 assigned account. The collections in the

assigned receivables were applied to the principal of the loan. Additional cash

is paid for the interest accruing for the month.

Requirements: Provide the journal entries under (a) notification basis and (b) non-

notification basis and compute for Mornings’s “equity in the assigned receivable” at

month-end. (Ignore the amortization of the “Discount on loan payable”).

8. Solutions:

 Journal entries

Notification basis Non-notification basis

1. To record the assignment

Accts. receivable – assigned 900K

Accounts receivable 900K

Accts. receivable – assigned 900K

Accounts receivable 900K

2. To record the receipt of loan

Cash 723K

Discount on L/P (900M x 3%) 27K

Loan payable

750K
Cash 723K

Discount on L/P (900M x 3%) 27K

Loan payable 750K

3. To record the collections

No entry yet

Cash 350K

Sales returns 560

Accts. rec’ble – assigned 350,560

4. To record the write-off

Allowance for bad debts 530

Accts. receivable – assigned 530

Allowance for bad debts 530

Accts. receivable – assigned 530

5. To record the remittance of collections to Sunday, plus interest

Not applicable (see #’s 6 & 7 below)

Loan payable 350K

Interest expense (a) 7.5K

Cash

357.5K

6. Sunday Financing Corp. notifies Morning Co. of the collections

Loan payable 350K

Accts. rec’ble – assigned 350,560

7. Morning Co. pays the interest

Interest expense (a) 7.5K

Cash

7.5K

(a) (750K x 12% x 1/12) = 7.5K

 Equity in assigned receivables

A/R – assigned Loan payable

beg. 900,000 750,000 beg.

350,560

collection payment 350,000  

530 write-off  

548,910 end. end. 400,000  

A/R - assigned (900K - 351,090) 548,910

Loan payable (750K - 350K) (400,000)

Equity in assigned receivables 148,910

Receivable financing -Factoring

9. Mug Co. factored P400,000 accounts receivable with Coffee Financing Corp.

undr the arrangement, MUG was to handle disputes concerning service, and

Coffee Financing was to make the collections and handle the sales discounts.

Coffee charges 6% service fee and retained 2% to cover sales discounts.

Requirements:

a. Prepare the journal entries in Mug’s and Coffees’ respective books to record

the factoring assuming the factoring was made on a non-recourse basis and,
as to MUG, the transaction is only a one-time event.

b. Prepare the journal entries in MUG’s books assuming the factoring was made

in a recourse basis and MUG uses factoring as a regular means of financing.

The recourse provision has a fair value of P7,000.

9. Solutions:

Requirement (a):

Mug Co.’s books:

Cash (squeeze) 368,000

Due from Factor (2% × ₱400,000) 8,000

Loss on Sale of Receivables (6% × ₱400,000) 24,000

Accounts Receivable 400,000

Coffee Co.’s books:

Accounts Receivable 400,000

Due to Mug 8,000

Financing Revenue 24,000

Cash 368,000

Requirement (b):

Mug Co.’s books:

Cash 368,000

Due from Factor 8,000

Service charge (6% × ₱400,000) 24,000

Loss on recourse obligation 7,000

Accounts Receivable 400,000

Recourse Liability 7,000

10. On November 1. 20x1, Sunny Friday Co. discounted a P1,000,000, 6-month,

12% note, received from a customer on July 1, 20x1, with a bank at 16%.

Requirement: Provide the entry on November 1 under each of the following

scenarios: the discounting is made on a (a) without recourse basis, (b) with

recourse basis-conditional sale, and (c) with recourse basis-secured borrowing.

10. Solution:

Maturity value = Principal + Interest for the full term of the note

Maturity value = 1,000,000 + (1,000,000 x 12% x 6/12)

Maturity value = 1,060,000

Discount period = unexpired term (or full term – expired term)

Discount period = 6 months – 4 months from July 1 to Nov. 1

Discount period = 2 months

Discount = Maturity value x Discount rate x Discount period

Discount = 1,060,000 x 16% x 2/12

Discount = 28,267

Net proceeds = Maturity value - Discount

Net proceeds = 1,060,000 – 28,267

Net proceeds = 1,031,733

Interest income = accrued interest as of date of discounting

Interest income = 1,000,000 x 12% x 4/12

Interest income = 40,000

Requirement (a): Without recourse basis

Nov. 1,

20x1

Cash (equal to net proceeds)

Loss on discounting (squeeze)

8,267

Note receivable

Interest income

1,000,000

40,000

Requirement (b): With recourse basis – Conditional sale

Nov. 1,

20x1

Cash (equal to net proceeds)

Loss on discounting (squeeze)

Note receivable discounted

Interest income

1,031,733

8,267

1,000,000

40,000

Requirement (c): With recourse basis – Secured borrowing

Nov. 1,

20x1

Cash (equal to net proceeds)

Loss on discounting (squeeze)

Interest income

1,031,733

8,267

1,000,000

40,000