EX. 17-5

Low-interest loans constitute a subsidy and hence an expense.

The Business Development Corporation (BDC), a federal agency (fictitious), makes loans to high-tech companies that satisfy specified criteria. The loans are intended to encourage research and development and are made at rates substantially below market.

The BDC made a loan of $100,000 to Interface Networks, Inc. The interest rate was 6 percent, and the loan was payable over a three-year period in equal installments of $37,411. At the time of the loan, prevailing Treasury interest rates for loans of comparable maturities were 10 percent.

What was the amount of the loan subsidy?

How and when should the agency recognize the value of the subsidy? Explain.

Prepare a journal entry to record the loan and recognize the subsidy.