Question

The Sea Level Bank has Gross Loans of $800 million with an ALL account of $45 million. Two years ago the bank made a loan for $12 million to finance the Sunset Hotel. Two million dollars in principal was repaid before the borrowers defaulted on the loan. The Loan Committee at Sea Level Bank believes the hotel will sell at auction for $7 million and they want to charge off the remainder immediately.

Answer 1

a.)

The dollar figure for Net Loans before the charge-off is:

Net Loans = Gross Loans –ALL = $800 − $45 = $755 million

b.)

After the charge-off, what are the dollar figures for Gross Loans, ALL and Net Loans assuming noother transactions?

Gross Loans = $800 million – ($10 million − $7 million) = $797 million

ALL =$45 million – ($12 million− $2 million − $7 million) = $42 million (The amount of the loan that is bad)

Net Loans = Gross Loans – ALL = $797 − $42 = $755 million

c.)

If the Sunset Hotel sells at auction for $10 million, how will this affect the pertinent balance sheetaccounts?

Gross loans and ALL would not change as the bank would recover all the money invested earlier.