Question

On June 30, 2013, Carl's Cleaning Service (Carl's) obtained a loan from Federal Way Bank (FWB) for $1 million with interest of $15,000 due quarterly. The loan principal is due June 30, 2016. The loan is secured by Carl's fleet of vans with a fair value of $1 million as of June 30, 2013. Immediately after making the third quarter payment of interest in 2014, Carl's notified FWB that it was in financial hardship and would not be able to make any future payments on the loan. The fair value of the loan at this time was determined to be the fair value of the secured collateral of $750,000. How would this impairment be recorded by FWB using IFRS?

A: Debit loan impairment for $250,000 and credit allowance on loan receivable for $250,000.

B: No entry would be permitted to reduce the carrying amount of this loan until FWB relieved Carl of all or a portion of this obligation.*

C: Debit loan impairment for $750,000 and credit loan receivable for $750,000

D: Debit loss on loan impairment and credit allowance on loan receivable for $250,000.

I know it is not B.

Answer 1

Option D- Debit loss on loan impairment and credit allowance on loan receivable for $250,000

Reason -

AS per GAAP- The Amount of loan receivable of $1 million shall be written down by $250,000 to the fair market value of the Collateral of $ 750,000 and $250,000 shall be recorded as loss on the loan.

Journal in Books of FWB

Date	Particular	Debit	Credit
	Loss on Loan Impairment a/c dr To Allowance on Loan Receivable a/c [Being loss recorded ]	$250,000	$250,000