Forgivable PPP Loans

The Paycheck Protection Program (PPP) is a $669-billion business loan program established in 2020 by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) to help certain businesses and other organizations continue paying their workers. The PPP allows businesses to apply for low-interest loans to pay for payroll costs, rent, interest, and utilities. The loan may be partially or fully forgiven if the business keeps its employee counts and employee wages stable.

Yogurt Yoghurt Yogurt (YYY) received a five-year, $600,000 PPP loan on June 30, 2020 that it plans to use to pay employee wages. The loans interest rate is 1%, but interest payments are deferred until the end of the loans five-year term. As of June 30, YYY believes there is a 60% chance the loan will be fully forgiven, a 20% chance it will be partially forgiven (i.e., one half of the loan will be forgiven), and a 20% chance the loan will not be forgiven.

1. After YYY receives the $600,000 cash on June 30, 2020, how will YYY display the PPP loan in its second-quarter financial statements? In other words, the receipt of the loan will lead to a $600,000 increase in YYYs cash and an effect on what other account(s)? Possible answers include but are not limited to: a loan liability, grant revenue, grant income (a gain), a reduction to payroll expense, some combination of these, or something else altogether. Briefly discuss and explain your answer in no more than a few sentences.