Chapter 21

5. State Bank has the following year-end balance sheet (in millions): Assets Liabilities and Equity Cash $10 Deposits $90 Loans 90 Equity 10 Total assets 100 Total liabilities and equity 100

The loans primarily are fixed-rate, medium-term loans, while the deposits are either short-term or variable-rate deposits. Rising interest rates have caused the failure of a key industrial company, and as a result, 3 percent of the loans are considered uncollectable and thus have no economic value. One-third of these uncollectable loans will be charged off. Further, the increase in interest rates has caused a 5 percent decrease in the market value of the remaining loans. What is the impact on the balance sheet after the necessary adjustments are made according to book value accounting? According to market value accounting?