PROBLEM 13 - Expected Credit Loss -12 months vs Lifetime

On January 1, 2021, CLOY Company granted a five-year term loan on P1,500,000 on GOBLIN Company. If there were no possibility of credit losses, the coupon rate that CLOY Company would charge the borrower is 10% per annum, However, because of the borrower's credit rating, CLOY Company estimates that there is a possibility the borrower might default on the payments and the expected credit losses are estimated at P20,000 per year over the five-year term. Accordingly, CLOY Company charges the borrower 12% coupon rate to reflect the yield on the instrument to include a return to cover those credit losses expected when the loan is first recognized.

Required:

1.Compute for the lifetime expected credit loss.

2.Compute for the 12-month expected credit loss.

3.Prepare the journal entry on initial recognition of the loan.

4.Prepare the entry assuming there is no significant deterioration of credit risk for the year ended 2021,

5.Prepare the entry assuming there is significant deterioration of credit risk for the year ended 2021.

PROBLEM 14- Expected Credit Loss

On January 1, 2021, prison granted a P20 million loan to Break Company. The loan is repayable by the on equal annual instalments of P4.80 million over a five-year term. The effective interest rate that Prison charges the borrower is 6.4% per annum comprising 4% risk-free rate and 2.4% for credit risk. Prison estimate that there is a 70% chance that the loan will not default, a 20% chance that the loand defaultand the expected cash flow in each year us P3.60 million; and a 10% chance that the loan defaults and the expected cash flow in each year is P3.00 million.

Required:

1.Compute for the amount of cash shortfall for the five year period.

2.Compute for the probability weighted cash shortfall

3.Compute for the lifetime expected credit loss

4.Compute for the 12-month expected credit loss

5.Prepare the journal entry in 2021.