Problem 4 (15 Points, freakonomics.lb) The following page shows the balance sheet of Bank Audi on June 30, 2020. The economic and banking crisis hitting Lebanon has made key assets (highlighted in yellow) worth less than their book value. First, the "balance at central bank" part of the cash asset is mostly "trapped" at BDL (Bank du Liban) and cannot be withdrawn (for the most part) because BDL and the Lebanese government are "broke" (simply put). Second, a majority of customers are unable to pay their loans anymore, so that the "loans and advances to customers" asset is not producing the expected economic benefits. Finally, the "financial assets at amortized cost" pertain mostly to debt instruments issued by the government, which are expected to produce much less benefit than expected because of the latest Lebanon's default on the payment of its Eurobonds debt. The implication of this is that Audi can no longer meet its obligation to customers manifested in the highlighted "customers' deposit" liability. This is leading to an illegal "capital control" situation (at Audi and other banks). Bottom line, the bank cannot get money from BDL and the customers who took loans, and customers with deposits cannot get their money out of the bank. A solution proposed by the few nonsense-free financial experts (e.g. Dan Azzi) is for BDL to sell part of its gold reserve and pay some of its obligation to the banks. This will allow Audi to obtain cash from the "balance at central bank" asset to pay-off in real cash (and close) the deposits of the majority of "small" customers who constitute 90% of the deposit accounts count and are only 10% of the total deposits value. The remainder 10% of customers (around 2,000 very wealthy individuals) will not be offered cash. Rather, Audi will offer these "big" customers common stocks in the bank in exchange for the deposits that will be also closed down. (This is like the conversion of a bond to stock that we talked about in class.) Required a. Assuming that the government, Audi, and the depositors agree to liquidate some gold and close the deposits as described above. Write down the journal entries that will lead to closing down all deposits. b. Will the solution in (a) affect BDL's balance sheet in terms of overall asset value? Justify your answer in three lines. c. Will the journal entries in (a) affect Audi's income statement? Justify your answer in two lines. d. What does GAAP recommend for the "financial assets at amortized cost?" Describe the process in one line and write down the corresponding journal entry. INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2020 (UNAUDITED) Unaudited Audited 30 June 2020 31 December 2019 LBP Million BPM ASSETS Cash and balaras with conta banks 23.1659 Due from burks and autom 2.275.900 2.177.906 Loans to banks and financial mond revere purchase agreements TE Defnancial instruments 20.5 29.9.24 Francora un profit or less 352 3802 Loans and to customemorados 1270 15,461,671 Loans and stored parties at amortidest 122.905 140,439 Debtors by acceptances 1955 657579 Francis amorte.com 71221 12312444 Francial stats 2 for waste through other competente income 2.614.775 1549 11553 21.129 Property and cont and rightsets 90.43 097,166 Intangibles 10767 115.144 25 289909 Others 1771.05 492.67 Defend 72.550 87,120 Good 0.422 TOTAL ASSETS 55.871,754 59.599,337 LIABILITIES Due toate banks 696 5,651962 De banks and financial institutions 1227.25 ISSE.504 De banks de rechargement 105.75 Det financial instruments S 372.102 Customers 39.920 3336560 Depost from a partas 1386 276.110 Det and other bonowed funds 1585.872 Engagements by coutances 108.995 57,579 Others 14 29.4 584066 Cuentas 9.50 Detened to be 38.034 2.678 This form and changes 15 154.115 172819 TOTAL LIABILITIES 51214.766 55,122,711 SHAREHOLDERS' EQUITY - GROUP SHARE Share capital como a 0672 Share-press 10.00 100 e-commons 3.50 383 32 9900 Cash contribution total 72.586 72.556 Non distributives 2.6662 2005,201 194.110 23.057 190 190 5240 1466,758 Others 11.363239 Retof the pered 50 2.177 4,681895 NON-CONTROLLING INTERESTS 175,093 19220 TOTAL SHAREHOLDERS' EQUITY 656,93 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 55,871.754 59.599.21 Problem 4 (15 Points, freakonomics.lb) The following page shows the balance sheet of Bank Audi on June 30, 2020. The economic and banking crisis hitting Lebanon has made key assets (highlighted in yellow) worth less than their book value. First, the "balance at central bank" part of the cash asset is mostly "trapped" at BDL (Bank du Liban) and cannot be withdrawn (for the most part) because BDL and the Lebanese government are "broke" (simply put). Second, a majority of customers are unable to pay their loans anymore, so that the "loans and advances to customers" asset is not producing the expected economic benefits. Finally, the "financial assets at amortized cost" pertain mostly to debt instruments issued by the government, which are expected to produce much less benefit than expected because of the latest Lebanon's default on the payment of its Eurobonds debt. The implication of this is that Audi can no longer meet its obligation to customers manifested in the highlighted "customers' deposit" liability. This is leading to an illegal "capital control" situation (at Audi and other banks). Bottom line, the bank cannot get money from BDL and the customers who took loans, and customers with deposits cannot get their money out of the bank. A solution proposed by the few nonsense-free financial experts (e.g. Dan Azzi) is for BDL to sell part of its gold reserve and pay some of its obligation to the banks. This will allow Audi to obtain cash from the "balance at central bank" asset to pay-off in real cash (and close) the deposits of the majority of "small" customers who constitute 90% of the deposit accounts count and are only 10% of the total deposits value. The remainder 10% of customers (around 2,000 very wealthy individuals) will not be offered cash. Rather, Audi will offer these "big" customers common stocks in the bank in exchange for the deposits that will be also closed down. (This is like the conversion of a bond to stock that we talked about in class.) Required a. Assuming that the government, Audi, and the depositors agree to liquidate some gold and close the deposits as described above. Write down the journal entries that will lead to closing down all deposits. b. Will the solution in (a) affect BDL's balance sheet in terms of overall asset value? Justify your answer in three lines. c. Will the journal entries in (a) affect Audi's income statement? Justify your answer in two lines. d. What does GAAP recommend for the "financial assets at amortized cost?" Describe the process in one line and write down the corresponding journal entry. INTERIM CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2020 (UNAUDITED) Unaudited Audited 30 June 2020 31 December 2019 LBP Million BPM ASSETS Cash and balaras with conta banks 23.1659 Due from burks and autom 2.275.900 2.177.906 Loans to banks and financial mond revere purchase agreements TE Defnancial instruments 20.5 29.9.24 Francora un profit or less 352 3802 Loans and to customemorados 1270 15,461,671 Loans and stored parties at amortidest 122.905 140,439 Debtors by acceptances 1955 657579 Francis amorte.com 71221 12312444 Francial stats 2 for waste through other competente income 2.614.775 1549 11553 21.129 Property and cont and rightsets 90.43 097,166 Intangibles 10767 115.144 25 289909 Others 1771.05 492.67 Defend 72.550 87,120 Good 0.422 TOTAL ASSETS 55.871,754 59.599,337 LIABILITIES Due toate banks 696 5,651962 De banks and financial institutions 1227.25 ISSE.504 De banks de rechargement 105.75 Det financial instruments S 372.102 Customers 39.920 3336560 Depost from a partas 1386 276.110 Det and other bonowed funds 1585.872 Engagements by coutances 108.995 57,579 Others 14 29.4 584066 Cuentas 9.50 Detened to be 38.034 2.678 This form and changes 15 154.115 172819 TOTAL LIABILITIES 51214.766 55,122,711 SHAREHOLDERS' EQUITY - GROUP SHARE Share capital como a 0672 Share-press 10.00 100 e-commons 3.50 383 32 9900 Cash contribution total 72.586 72.556 Non distributives 2.6662 2005,201 194.110 23.057 190 190 5240 1466,758 Others 11.363239 Retof the pered 50 2.177 4,681895 NON-CONTROLLING INTERESTS 175,093 19220 TOTAL SHAREHOLDERS' EQUITY 656,93 TOTAL LIABILITIES AND SHAREHOLDERS EQUITY 55,871.754 59.599.21