ABN Bank granted A £1 million loan to ABC Engineering Ltd (Stirling) on the 1^st of January 2019.

The loan is repayable in 2 years’ time (31^st December 2020) and bears an annual interest of 7%. The interest is payable in arrears on the 1^st January 2020, and on the 1^st January 2021 along with the principal repayment.

A similar loan in the market normally bears interest at 9%. However, ABC Ltd has agreed to transfer all banking business to ABN Bank upon commencement of the loan agreement, and the Bank has therefore agreed to receive a lower yield on the loan.

On the 31^st December 2019, a similar loan on the market yields 9.5%.

You are required to:

a) Prepare appropriate accounting entries (either in journal form or through the use of “T-accounts”) which will show the financial position of ABN Bank as at the end of 2019 with regards to the load made to ABC Ltd. Include an extract to the financial statements which supports your calculations.

b) Calculate the interest income that ABN Bank would show as being accrued at the end of 2020 and discuss/show what the Bank would be required to do to represent this amount in its financial statements.

c) Discuss TWO possible alternatives that ABN Bank might follow if ABC Ltd wished to pay off the loan in full at some point in time during the year to December 2020. Explain the criteria and the specific rules outlined in the appropriate reporting/accounting standard(s).

NOTE: construct your answers to parts (a) and (b) by treating the loan agreement as a straight-forward financial instrument, discounting the differences at the appropriate value(s).