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On 1 January 20X2, a bank originated a loan of 500,000 which was classified as financial asset at amortised cost. The loan requires annual interest
On 1 January 20X2, a bank originated a loan of 500,000 which was classified as financial asset at amortised cost. The loan requires annual interest payments of 20,000 and is fully repayable at 31 December 20X7. The effective interest rate is 4%. At 31 December 20X2, the loan is considered to be low credit risk and the probability of default is estimated to be 1.5%. The expected loss on default is estimated at 125,000. Required: Compute the following items at 31 December 20X2, showing all workings: a) Impairment loss allowance. b) Carrying amount of the loan
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