On 1 January 2005, entity A originated a ten-year 7 per cent EUR 2m loan. The loan is repaid in equal annual payments of EUR 284,756 through to maturity date at 31 December 2014. Entity A charged a 1.25 per cent (EUR 25,000) non-refundable loan origination fee to the borrower and also incurred EUR 50,000 in direct loan origination costs. 

The contract specifies that the borrower has an option to prepay the instrument and that no penalty will be charged for prepayment. At inception, the entity expects the borrower not to prepay. The initial carrying amount of the loan is calculated as follows: 

(a) Should the prepayment option be separately accounted for?

(b) Determine the carrying amount of the loan at the end of each year until its maturity.

Transcribed Image Text:

Loan principal Origination fees charged to borrower Origination costs incurred by lender Carrying amount of loan 2,000,000 (25,000) 50,000 2,025,000