bookeeping fundamentals

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FUNDAMENTALS OF

BOOKKEEPING

UCPB SAVINGS BANK

Operations Division



2

INTRODUCTION

This mini-lesson includes learning objectives,

background information, discussion questions, anactivity, and sources of additional information.



OBJECTIVESAssociates will learn:

• How loans bookkeeping flows.

• What documents to require and items to look into prior to

booking.

• How to properly classify loans accordingly.

• What are the acceptable mode of payments and hierarchy of

payments.

• How interest paid or received is calculated.

• The difference between interest computation methods.

• How to calculate penalties/charges.

• How repaying a loan early saves you money.

• The life-cycle of a loan with relation to bookkeeping.



Overview of Bookkeeping Cycle

Current

Past Due

Restructured

Items Under Litigation

Acquired Assets (ROPA)

Sales Contract Receivable

B O O K I N G

M A T U R I T Y

o r P A Y O F F



Basis of Booking

• Documents Required Prior to Booking

– CRAM

– BIS – Transaction Ticket

– PN with Disclosure Statement

• Items for Checking – Completeness & corrretness of details

– Proper approvals



Type of Loans

• COMMERCIAL LOANS• AGRICULTURAL LOANS

• INDUSTRIAL LOANS

• REAL ESTATE LOANS

• SMALL BUSINESS LOANS

• CONSUMPTION LOANS

– AUTO/TRUCK/FLEET)

– SALARY LOANS – TPL/PSPL/PSND

– CASH LOAN

– PVAO

• OTHER LOANS AND DISCOUNTS



Other Loans

• Back-to-back/one-to-one/hold-out-on

deposit

• Bills Purchased• Financial Assistance Program (FAP - for

employees)

• Letters of Credit – domestic/foreign



Type of Loans

• AGRICULTURAL LOANS - This represents loans to finance

agricultural production and related activities, purchase of

farm machinery, equipment and implements work/breeding

animals, including but not limited to the establishment and

operation of poultry, piggery, livestock and fishery projects.

• INDUSTRIAL LOANS - This represents loans to finance the

production, processing transformation, handling and/or

transportation of industrial products and /or

conservation, enlargement, or improvement of productive

properties, or the acquisition of machinery or other fixed

installation.

• COMMERCIAL LOANS - This represents loans to finance the

purchase of products or merchandise for resale.



Type of Loans

• REAL ESTATE LOANS

This represents loans to finance and/or refinance the

construction, acquisition, expansion, or improvement or

rural/ urban properties.

• CONSUMPTION LOANS

This represents loans for personal and household finance, such

as care, household appliances, furniture sans fixtures and/ or to

pay taxes, hospital and education bills.

• OTHER LOANS DISCOUNTS

This account represents loans granted for purposes other than

agricultural, commercial, industrial, real estate or consumption.



Type of Loans

ABOVE LOAN ACCOUNTS ARE

– DEBITED FOR:

• new loans granted

• any debits than new loans granted should be properlydescribed.

– CREDITED FOR:

payments received applied to principal

• reclassification to past due or items in litigation.

In case of renewal, debit the new loan and credit the old loan.



Classification of loans

• CURRENT LOANS AND DISCOUNTS

This represents all loans with updated accounts.

• PAST DUE LOANS AND DISCOUNTS

Past Due accounts are being classified as follows:

BSP Policy

Monthly installment – 3

Quarterly payment – 1

Semi - Annually – 1

Annually – 1

ACCOUNT IS DEBITED FOR:

a. transfer from current to Past Due

ACCOUNT IS CREDITED FOR:

transfer from past due to Items in Litigation

payments received applied to principal

write off (direct off or against valuation reserve)

renewals/restructurings




• RESTRUCTURED LOANS

This represents loans that were past due and whose terms and conditions of grant have been

modified in accordance with a restructured agreement. The modification of terms may

include, but is not limited to an extension of maturity or a change in interest rate, collateral or

in the face accumulated charges. Provided, that Accrued Interest and accumulated charges on

restructured are credited to “ Interest Earned not yet collected” and treated as a deferred

credit pending collection.

ACCOUNT IS DEBIIED FOR:

a. the outstanding principal balance plus accrued interest and accumulated

charges when the past due loans are restructured.


a. receipt of payment (only after deferred credit

has been fully paid/reversed).




• ITEMS IN LITIGATION

This represents all loans and advances refereed to the bank’s lawyer or sheriff for

collection/foreclosure court action as the case maybe. The loan or advance shall remain in

this account during the tendency of the legal proceedings until it is fully paid or the

property is foreclosed.

ACCOUNT IS DEBITED FOR:

a. transfer from Past due to Items in Litigation


a. payments received applied to principal

b. writes offs

c. renewal/restructurings

d. foreclosure of property/collateral mortgaged



Loan Tenor

• Term Factor/ Denominator

360 days – term of loan is 360 days or less

365 days – term of loan is more than 360 days

• Term of Loan

Short term - one year or less

Medium Term – more than 1 year to 5 yearsLong Term – more than 5 years



Mode of Payments

• INSTALLMENTS

– MONTHLY

– QUATERLY

– SEMI-ANNUALLY

– ANNUALLY

• BALLOON

• DISCOUNTED/INTEREST COLLECTED IN

ADVANCE

• COMBINATION OF 1 & 2





Hierarchy of Payments

» ACCOUNTS RECEIVABLE

» ACCRUED INTEREST

RECEIVABLE» SERVICE CHARGES

» PENALTIES

» INTEREST» PRINCIPAL



Laws on Rates

Laws have been passed to minimize some of the

confusion consumers face when they borrow or

lend money. The Truth in Lending Act, RA

3765, has made it easier for consumers to

compare rates when they borrow money.

Similarly, the purpose of the Disclosure of

Effective Rate of Interest on Savings Deposit,BSP Cir. No. 533, is to assist consumers in

comparing the rates on savings accounts offered

by depository institutions.



INTEREST CALCULATIONS

Interest represents the price borrowers pay to

lenders for credit over specified periods of

time. The amount of interest paid depends on anumber of factors: the amount lent or

borrowed, the length of time involved in the

transaction, the stated (or nominal) annual rate

of interest, the repayment schedule, and themethod used to calculate interest (Interest Rate is

quoted on an annual basis unless other term is specified ).




• Diminishing Balance*F O R M U L A

Interest Monthly = Principal x Interest Rate x Number of Days

360 or 365

Amortization Monthly = Loan Amount1 - Interest Rate Term

Total

12 . OR

Interest Rate

12

AmortizationMonthly

= Loan Amount

12 _ 12 x Interest Rate TermTotal

Interest Rate Interest Rate 12



AMORTIZATION SCHEDULE BASED ON DIMINISHING METHOD I.C.D.P & CO., INC.

PINCIPAL: 50,000.00

INTEREST RATE: 30.00% PN NO: 900100000

VALUE DATE: 18-NOV-93 TERM: 181 DAYS

REPAYMENT: Monthly payment of principal & interest in the amount of P 9,078.00 every 23rd of the

month to start on Dec. 18, 1993.

---------------------------------------------------------------------------------------------------------------

Date of Total Outstanding

Payment Payment Interest Principal Balance

----------------------------------------------------------------------------------------------------------------

50,000.00

18-Dec-93 9,078.00 1,250.00 7,828.00 42,172.00

18-Jan-94 9,078.00 1,089.44 7.988.56 34,183.44

18-Feb-94 9,078.00 883.07 8,194.93 25,988.52

18-Mar-94 9,078.00 606.40 8,471.60 17,516.91

18-Apr-94 9,078.00 452.52 8,625.48 8,891.43 18-May-94 9,113.72 222.29 8,891.43 0.00

----------------------------------------------------------

54,503.72 4,503.72 50,000.00

==================================




• Straight Line

Interest Total = Loan Amount x Interest Rate x Term Total

100 12

Interest Monthly = Interest Total

Term Total

Amortization Monthly = Loan Amount + Interest Total

Term Total

Principal Monthly = Amortization Monthly – Interest Total



AMORTIZATION SCHEDULE BASED ON STRAIGHT LINE METHOD I.C.D.P & CO., INC.

PINCIPAL: 50,000.00

INTEREST RATE: 30.00% PN NO: 900100000VALUE DATE: 18-NOV-93 TERM: 181 DAYS

REPAYMENT: Interest collected in advance, principal to be paid upon maturity

----------------------------------------------------------------------------------------------Amortization Total Unearned Amortization Principal Outstanding

Date Payment Interest of Payment Balance

Discount Interest

----------------------------------------------------------------------------------------------7,541.67 7,541.67 0.00 50,000.00

30-Nov-93 0.00 0.00 500.00 0.00 50,000.00

31-Dec- 93 0.00 0.00 1,291.67 0.00 50,000.00

31- Jan- 94 0.00 0.00 1,291.67 0.00 50,000.00

28-Feb- 94 0.00 0.00 1,166.67 0.00 50,000.00

31-Mar-94 0.00 0.00 1,291.67 0.00 50,000.00

30-Apr-94 0.00 0.00 1,250.00 0.00 50,000.00

18-May-94 50,000.00 0.00 750.00 50,000.00 0.00 -------------------------------------------------------------

54,541.67 7,541.67 7, 541.67 50,000.00

=====================================




• Rule of 78

Interest Total = Loam Amount x Interest Rate x Term Total

100 12

SYD = Term Total + 1 x Term Total 2

Interest Monthly = Interest Total x Term Remaining

-----------------------------------

SYD

Amortization Monthly = Loan Amount x Interest Rate /100

Term Total

Principal Monthly = Amortization Monthly – Interest Monthly



AMORTIZATION SCHEDULE BASED ON RULE OF 78

I.C.D.P & CO., INC.

PrINCIPAL: 100,000.00

INTEREST RATE : 20.00% PN NO : 510100000

VALUE DATE: Nov. 18, 1993 TERM : 12 MONTHS

REPAYMENT: Monthly installment of P10,000.00 every 23rd of the month to start on Dec. 18, 1993.

No. of Total Outstanding

Payment Payment Interest Principal Balance

100,000.00

1 10,000.00 3,076.92 6,923.08 93,076.92

2 10,000.00 2,820.51 7,179.49 85,897.44

3 10,000.00 2,564.10 7,435.90 78,461.54

4 10,000.00 2,307.69 7,692.31 70,769.23

5 10,000.00 2,051.28 7,948.72 62,820.51

6 10,000.00 1,794.87 8,205.13 54,615.38

7 10,000.00 1,538.46 8,461.54 46,153.858 10,000.00 1,282.05 8,717.95 37,435.90

9 10,000.00 1,025.64 8,974.36 28,461.54

10 10,000.00 769.23 9,230.77 19,230.77

11 10,000.00 512.82 9,487.18 9,743.59

12 10,000.00 256.41 9,743.59 -

78 120,000.00 20,000.00 100,000.00




• Effective Interest

Interest Monthly = Principal x Interest Rate

Term Total

Amortization Monthly = Loan Amount

1 - Interest Rate TermTotal

12 OR

. Interest Rate/12

Amortization Monthly = Loan Amount .

12 / Interest Rate - ( 12 x Interest Rate TermTotal)

Interest Rate 12

Principal Monthly = Amortization Monthly – Interest Monthly



EFFECTIVE INTEREST RATE METHOD

Diminishing Balance – actual no. of days , used in REL

Example:

AF = 100K Value Date = 1/1/93

Rate = 12% Frequency = quarterly

Term = 12 months First Due Date = Feb. 1

0/S Bal. * Rate* no. of days

365

Computed Quarterly:

Principal Interest O/S Bal. Int. R Terms Factor

Q1 25,000 2,958.90 100,000 21% 12 .093113774

Q2 25,000 2,243.84 75,000 21% 24 .051385651

Q2 25,000 1,512.33 50,000 21% 36 .037675067

Q3 25,000 756.16 25,000 21% 48 .030965695

----------- ----------7,471.23 142 120 .015526643

Computed Monthly:

Principal Interest O/S Balance

M1 8,333.33 1,019.18 100,000.00

M2 8,333.33 843.84 91,666.57

M3 8,333.33 743.79 75,000.01

M4 8,333.33 679.45 66,666.68

M5 8,333.33 575.34 58,333.35

M6 8,333.33 509.59 50,000.02

M7 8,333.33 410.96 41,666.69

M8 8,333.33 849.32 83,333.34

M9 8,333.33 339.73 33,333.36

M10 8,333.33 246.58 25,000.03

M11 8,333.33 169.86 16,666.70

M12 8,333.37 82.19 8,333.37

---------- 0.00

6,465.77



Penalty Computation

P = UA x PR x T / 30

Where: P = Penalty

UA = Unpaid Amortization

PR = Penalty Rate

T = Time (No. of Days from last

payment date or dueDate whichever is later)



Sample Computation of Penalty Given:

Principal : P100,000.00

MC prepared for proceeds of P100,000.00

Value Date: Nov. 18, 1993

First due date: Dec. 18, 1993

Cash Payments made as follows:

Dec. 18, 1993 10,000.00

April 1, 1994 20,000.00May 15, 1994 20,000.00

May 19, 1994 ? full payment

Expenses incurred:

April 30, 1994 5,000.00 Litigation Expenses

May 16, 1994 7,500.00 Insurance premiums

advanced by the bank Account was endorsed to legal on April 15, 1994

Penalty rate 5% per month

Refer to Rule of 78 Amortization schedule

Instructions: Prepare necessary accounting entries & show computation of

penalties & amount to prepay.



SIMPLE INTEREST

The various methods used to calculate interest are

basically variations of the simple interest

calculation method. The basic concept underlying

simple interest is that interest is paid only on theoriginal amount borrowed for the length of time

the borrower has use of the credit. The amount

borrowed is referred to as the principal. In the

simple interest calculation, interest is computed

only on that portion of the original principal still

owed.



Add-on interest, bank discount, and compoundinterest calculation methods differ from the simpleinterest method as to when, how, and on whatbalance interest is paid. The "effective annual rate"for these methods is that annual rate of interestwhich, when used in the simple interest rate formula,equals the amount of interest payable in these othercalculation methods. For the declining balance

method, the effective annual rate of interest is thestated or nominal annual rate of interest. For themethods described below, the effective annual rateof interest differs from the nominal rate.

OTHER CALCULATION

METHODS



When the add-on interest method is used, interest is

calculated on the full amount of the original

principal. The interest amount is immediately

added to the original principal, and payments aredetermined by dividing principal plus interest by

the number of payments to be made. When only

one payment is involved, this method produces the

same effective interest rate as the simple interest

method. When two or more payments are to be

made, the effective rate of interest is greater than

the nominal rate.

Add-On Interest



The interest amount is calculated by applying the

nominal rate to the total amount borrowed, but

the borrower does not have use of the total

amount for the entire time period if two or morepayments are made.

Using the add-on interest method, interest of P50

(5% of P1,000 for one year) is added to theP1,000 borrowed, giving P1,050 to be repaid;

half (or P525) at the end of 6 months and the

other half at the end of the year.

More Facts



More Facts

A one-year, two equal-payment, 5% add-on rateloan is equivalent to a one-year, two equal-payment,6.631% declining balance loan, consider thefollowing. When the first P525 payment is made,P33.15 in interest is due (6.631% of P1,000 for one-half year). Deducting the P33.15 from P525 leavesP491.85 to be applied to the outstanding balance of P1,000, leaving the borrower with P508.15 to use

during the second half-year. The second P525payment covers P16.85 in interest (6.631% of P508.15 for one-half year) and the P508.15 balancedue.



More Facts

In this particular example, using the add-on

interest method means that no matter how many

payments are to be made, the interest will always

be P50. As the number of payments increases, theborrower has use of less and less credit over the

year. For example, if four quarterly payments of

P262.50 are made, the borrower has the use of

P1,000 during the first quarter, around P750

during the second quarter, around P500 during the

third quarter, and around P250 during the fourth

and final quarter.



.

Therefore, as the number of payments increases,

the effective rate of interest also increases. For

instance, in the current example, if four quarterly

payments are made, the effective rate of interest

would be 7.922%; if 12 monthly payments are

made, the effective interest rate would be

9.105%. The add-on interest method issometimes used by finance companies and some

banks in determining interest on consumer loans.

More Facts



Bank Discount When the bank discount calculation method isused, interest is calculated on the amount to bepaid back and the borrower receives the

difference between the amount to be paid back and the interest amount. The bank discountmethod is also referred to as the discountbasis.



Example 5 Consider the loan in Example 1 where a 5%,

P1,000 loan is to be repaid at the end of one year.

If the bank discount method is used, the interest

amount of P50 would be deducted from the P1,000,

leaving the borrower with P950 to use over the

year. At the end of the year, the borrower pays

P1,000. The interest amount of P50 is the same as

in Example 1.



More Facts

The borrower in Example 1, however, had the useof P1,000 over the year. Thus, the effective rate of interest in Example 5 would be 5.263% (P50divided by P950) compared to an effective rate of

5% in Example 1.

Borrowing that use the bank discount method oftenhave no intermediate payments. For example, thebank discount method is used for Treasury bills

sold by the Government and commercial paperissued by businesses. In addition, bonds are soldon a discount basis, i.e., at a price below their facevalue.



How Many Days in a Year?

In the above examples, a year was assumed to be

365 days long. Historically, in order to simplify

interest calculations, lenders and borrowers oftenassumed that each year had twelve 30-day months,

resulting in a 360-day year. For any given

nominal rate of interest, the effective rate of

interest will be greater when a 360-day year isused in the interest calculation than when a 365-

day year is used.



Example 6

Suppose that a P1,000 loan is discounted at 5%

and payable in 365 days. This is the situation in

Example 5 where, based on a 365-day year, the

effective rate of interest was 5.263%. If the bank discount calculation assumes a 360-day year,

then the length of time is computed to be

365/360 instead of exactly one year; the interest

deducted (the discount) equals P50.69 instead of

P50; and the effective annual rate of interest is

5.34%.



COMPOUND INTEREST

When the compound interest calculation is used,interest is calculated on the original principal plusall interest accrued to that point in time. Since

interest is paid on interest as well as on theamount borrowed, the effective interest rate isgreater than the nominal interest rate. Thecompound interest rate method is often used by

banks and savings institutions in determininginterest they pay on savings deposits "loaned" tothe institutions by the depositors.



Suppose P1,000 is deposited in a bank that pays a5% nominal annual rate of interest, compoundedsemiannually (twice a year). At the end of the firsthalf-year, P25 in interest (5 percent of P1,000 forone-half year) is payable. At the end of the year,the interest amount is calculated on the P1,000 plusthe P25 in interest already paid, so that the secondinterest payment is P25.63 (5% of P1,025 for one-

half year). The interest amount payable for theyear, then, is P25 plus P25.63, or P50.63. Theeffective rate of interest is 5.063 percent, which isgreater than the nominal 5% rate.

Example 7



More Facts

The more often interest is compounded within a

particular time period, the greater will be the

effective rate of interest. In a year, a 5% nominal

annual rate of interest compounded four times

(quarterly) results in an effective annual rate of

5.0945%; compounded 12 times (monthly),

5.1162%; and compounded 365 times (daily),5.1267%. The effective rate of interest is

disclosed as the Effective Yield (EY).



WHEN REPAYMENT IS

EARLY

In the above examples, it was assumed that

periodic loan payments were always made exactlywhen due. Often, however, a loan may be

completely repaid before it is due. When thedeclining balance method for calculating interest isused, the borrower is not penalized for prepaymentsince interest is paid only on the balance

outstanding for the length of time that amount isowed. When the add-on interest calculation isused, however, prepayment implies that the lenderobtains some interest that is unearned.



Rule of 78s

Some loan contracts make provisions for an interestrebate if the loan is prepaid. One method used indetermining the amount of the interest rebate isreferred to as the "Rule of 78s". Application of theRule of 78s yields the percentage of the totalinterest amount that is to be returned to theborrower in the event of prepayment. Thepercentage figure is arrived at by dividing the sum

of the integer numbers (digits) from one to thenumber of payments remaining by the sum of thedigits from one to the total number of paymentsspecified in the original loan contract.



More Facts

The more often interest is compounded within aparticular time period, the greater will be theeffective rate of interest. In a year, a 5%

nominal annual rate of interest compoundedfour times (quarterly) results in an effectiveannual rate of 5.0945%; compounded 12 times(monthly), 5.1162%; and compounded 365

times (daily), 5.1267%. The effective rate of interest is disclosed as the Effective Yield (EY).



Application of the Rule of 78s results in theborrowers paying somewhat more interest thanwould have been paid with a comparable

declining balance loan. How much more dependson the total number of payments specified in theoriginal loan contract and the effective rate of interest charged. The greater the specified total

number of payments and the higher the effectiverate of interest charged, the more the amount of interest figured under the Rule of 78s exceeds thatunder the declining balance method.

More Facts



More Facts

The difference between the Rule of 78s interest andthe declining balance interest also varies dependingupon when the prepayment occurs. This differenceover the term of the loan tends to increase up to

about the 1/3 point of the term and then decreaseafter this point. For example, with a 12-month term,the difference with prepayment occurring in thesecond month would be greater than the difference

that would occur with prepayment in the first month;the third-month difference would be greater than thesecond-month difference; etc. After the fifth month,each succeeding month's difference would be less

than the previous month's difference.



Example 8

Suppose that there are two P1,000 loans that are

to be repaid over 12 months. Interest on the first

loan is calculated using a 5% add-on method,

which results in equal payments ofP87.50 due atthe end of each month (P1,000 plus P50 interest

divided by 12 months). The effective annual rate

of interest for this loan is 9.105%. Any interest

rebate due because of prepayment is to be

determined by the Rule of 78s.



Example 8

Interest on the second loan is calculated using a

declining balance method where the annual rateof interest is the effective annual rate of interest

from the first loan, or 9.105%. Equal paymentsof P87.50 are also due at the end of each monthfor the second loan.

Suppose that repayment on both loans occurs

after one-sixth of the term of the loan has passed,i.e., at the end of the second month, with theregular first month's payment being made forboth loans.



Example 8

The interest paid on the first loan will be P14.74,while the interest paid on the second loan will beP14.57, a difference of 17 centavos. If the

prepayment occurs at the end of the fourth month(regular payments having been made), interest of P26.92 is paid on the first loan and interest of P26.69 on the second loan, a difference of 23centavos. If the prepayment occurs later at the endof the ninth month (regular payments having beenmade), P46.16 in interest is paid on the first loanand P46.07 in interest is paid on the second loan, adifference of but 9 cents.



CHARGES OTHER THAN

INTEREST

In addition to the interest that must be paid, loan

agreements often will include other provisions

which must be satisfied. Two examples of theseprovisions are mortgage points and required

(compensating) deposit balances.



Mortgage Points

Mortgage lenders will sometimes require the

borrower to pay a charge in addition to the

interest. This extra charge is calculated as a

percentage of the mortgage amount and is

referred to as mortgage points. For example, if 2

points are charged on a P100,000 mortgage, then

2 percent of P100,000, or P2,000, must be paid inaddition to the stated interest.



More Facts

The borrower, therefore, is paying a higher pricethan if points were not charged i.e., theeffective rate of interest is increased. In order to

determine what the effective rate of interest iswhen points are charged, it is necessary todeduct the peso amount resulting from the pointcalculation from the mortgage amount and add it

to the interest amount to be paid. The borroweris viewed as having use of the mortgage amountless the point charge amount rather than theentire mortgage amount.



Example 9

Suppose that 2 points are charged on a 20-year,

P100,000 mortgage where the rate of interest

(declining balance calculation) is 7%. The

payments are to be P775.30 per month. Once theborrower pays the P2,000 point charge, there is

P98,000 to use. With payments of P775.30 a

month over 20 years, the result of the 2-point

charge is an effective rate of 7.262%.



Example 9

The longer the time period of the mortgage, the

lower will be the effective rate of interest when

points are charged because the point charge is

spread out over more payments. In the aboveexample, if the mortgage had been for 30 years

instead of 20 years, the effective rate of interest

would have been 7.201%.



Required Deposit Balances

A bank may require that a borrower maintain a

certain percentage of the loan amount on deposit

as a condition for obtaining the loan. Theborrower, then, does not have the use of the entire

loan amount but rather the use of the loan amount

less the amount that must be kept on deposit. The

effective rate of interest is greater than it would beif no compensating deposit balance were required.



Suppose that P1,000 is borrowed at 5% from abank to be paid back at the end of one year.Suppose, further, that the lending bank requires

that 10% of the loan amount be kept on deposit.The borrower, therefore, has the use of only P900(P1,000 less 10%) on which an interest amountof P50 (5% of P1,000 for one year) is charged.

The effective rate of interest is, therefore, 5.556%as opposed to 5% when no compensating balanceis required.

Example 10



SUMMARY

Although not an exhaustive list, the methods of calculating interest described here are some of themore common methods in use. They indicate thatthe method of interest calculation cansubstantially affect the amount of interest paid,and that savers and borrowers should be awarenot only of nominal interest rates but also of hownominal rates are used in calculating total interest

charges. Always look to the EY that is to bedisclosed for the actual effective interest rate.



REAL & OTHER PROPERTIES ACQUIRED

This account includes real and other properties, other than those used forbanking purposes or held in the investment portfolio, acquired by the bank

judicially or extra judicially in settlement of loans and/or for other reasons.

The property acquired in settlement of loan shall be recorded at the balance

of the loan if bid price is higher. Or if bid price is lower, it shall be recorded

at the balance of the loan and the difference shall be recorded against

allowance for probable loss on real and other properties, However, theproperty acquired for other reasons shall be recorded at cost/appraised value,

whichever is applicable at the time of acquisition.

All expenses incurred in the preservation/maintenance thereof shall charged to

Litigation/Assets Acquired Expenses account, while all income realizedthereof shall be credited to assets Acquired Account. The corresponding

memorandum entries shall be made in the individual ledger account for these

items .

A i f ROPA



Accounting for ROPAGiven:

Bid Price 100,000.00

Outstanding Principal Balance 71,311.30

Booked Receivables:

Litigation Expenses 5,000.00

Insurance 7,500.00 12, 500.00

Instructions: Prepare necessary accounting entries & compute the book value of acquired

asset.

Book Value:

Outstanding Principal Balance 71, 311.38

Book Receivables 12, 500.00

Book Value 83, 811.38

Accounting Entries: Real & Other Properties Owned or Acquired (ROPOA) 83,811.38

IUL 71,311.38

AR-Litigation Expenses 5,000.00

AR – Insurance 7,500.00

Acctg for ROPA - ContinuationGi



Given:

Bid Price 50,000.00


Booked Receivables:

Litigation Expenses 5,000.00Insurance 7,500.00 12,500.00

Instruction: Prepare necessary accounting entries & compute the book value of acquired

asset.

Book Value:


Booked Receivables 12,500.00

Book Value 83,811.38

Accounting Entries:

Real & Other Properties Owned or Acquired (ROPOA) 83,811.38

IUL 71,311.38

AR-Litigation Expenses 5,000.00AR-Insurance 7,000.00

Allowance for Probable Losses – Loans 33,811.38

Allowance for Probable Losses – ROPOA 33,811.38

Re: Set-up loss reserve for ROPOA.



SALES CONTRACT RECEIVABLE

This represents the balance of the selling price of the

assets owned and/or acquired, sold on installing basis

under a duly executed Agreement to sell, title to which is

still in the name of the Bank. Installment sales method

shall be used wherein each collection consist partly of

recovery of cost and partly recovery of gross profit. The

profit recognized in the cash collections is based on the

percentage of total profit of total sales price.



Accounting for SCRGiven:

Book Value 83,811.38

Agreed Selling Price 120,000.00Down payment (paid in Cash) 20,000.00

Balance payable in 10 months

First Payment (paid in cash) 10,000.00

Instructions: Prepare necessary accounting entries & compute for the SCR, unrealized

profit percentage.

SCR: Agreed Selling Price 120,000.00

Less: down payment 20,000.00

SCR 100,000.00

Unrealized Profit: Agreed Selling Price 120,000.00Less: Book Value 83,000.00

Unrealized Profit 36,188.62

Profit Percentage:

Total Profit / Total Sales Price

36,188.62 / 120,000.00 30.16%



Accounting for SCR – Cont.Accounting Entries:

Cash 20,000.00

SCR 100,000.00

ROPOA 83,000.38

Income from SCR 6,031.44***

Unrealized Profit 30,157.18

Re: Booking SCR

*** recognized because of cash collection of down payment

Cash 10,000.00

SCR 10,000.00

Re: First Payment

Unrealized Profit 3,015.72Income from SCR 3,015.72

Re: Amount earned relative to payment received – 30.16% of P10, 000.00



Schedule of SCR & Unrealized Profit

No. of SCR Balance Unrealized Balance of Payments of SCR Profit Profit

-------------------------------------------------------------------------------------------------------------------------------------------------

100,000.00 30,157.18

1 10,000.00 90,000.00 3,015.72 27,141.47

2 10,000.00 80,000.00 3,015.72 24,125.75

3 10,000.00 70,000.00 3,015.72 21,110.03

4 10,000.00 60,000.00 3,015.72 18,094.31

5 10,000.00 50,000.00 3,015.72 15,078.59

6 10,000.00 40,000.00 3,015.72 12,062.877 10,000.00 30,000.00 3,015.72 9,047.15

8 10,000.00 20,000.00 3,015.72 6,031.44

9 10,000.00 10,000.00 3,015.72 3,015.72

10 10,000.00 0.00 3,015.72 (0.00) 100,000.00 30,157.18======== ========

Accounting for SCR – Cont.

WRITING OFF LOAN EXPOSURE




Loan Exposure shall include all receivables related to loans granted booked in the balance

sheet (i.e. loans granted accrued interest receivables and any advances made such as for

appraisal, insurance premiums or taxes).

1.All write offs on loan exposure shall require approval of the Board of Directors.

2.It shall be the responsibility of the Loan Officers/Division Head of the lending unit to

recommend approval of request for loan write off to the Board of Directors.

3.Loans and advances to directors, officers, stockholders, and their related interests,

whether direct or indirect should have prior approval of the Board of Directors.

4.A “Request for Loan Write-off shall contain the following:

•details of the loan exposure and security held

•brief history of relationship along with how and why account turned past due

•summary of collection efforts made since account went past due, highlighting, among

others, the major alternatives to recovery that were pursued but failed

•reason for recommending write-off

•details of action program and a timetable for proposed collection strategies

1.The Division Head shall present the Request to the Audit Department for review.2.Once reviewed, the Division Head shall present the request to the Board of Directors

for final approval.

3.After final approval of the Board of Directors of Loan exposure is less than P100,000

we send notice to CB and 30 days after receipt of CB account can be written off. For

DOSRI and those with more P100,000 loan exposure, we have to wait for the CB

approval prior to write off.




W NG O O N OSU

Applicable Situations

1.Writing off loan accounts shall be applied to the following situations:

•Where further collection efforts will no longer yield and meaningful

recoveries.

•Loans secured by hard assets but where the value of said assets when

foreclosed is less than the total loan exposure. That portion of the loan not

covered by the bid price on the asset may have to be written off if no other

source of payment can be identified.•Where all possible alternatives to resolving an unsecured loan account

have failed or where even winning the court case against client yields no

recovery due to the absence of any meaningful assets to garnish.

Collections on Written-off Accounts

1.On certain accounts where some recovery can still be made bycontinuing to exert pressure on the client, said accounts shall be handled

in the same way as the remedial management of other past-due accounts

not yet written-off.

2.We leave a P1.00 nominal value when writing off. This is for collection

monitoring.

V l ti R



Valuation Reserves

Loan Loss reserve refers to allocations provided for portions of loans granted are

deemed uncollectible. Loan loss reserves are determined by external auditors such

as Central Bank SGV auditors.

Loan loss Reserves shall be set up once every month in accordance with the

following classifications:

Per CB Policy;

Classified 0%Unclassified 0%

Substandard 25%

Doubtful 50%

Loss 100%

Per Banks Policy: Percentage of Loan Portfolio

Auto loan 1 % of grossOther Loans 3 % of gross

The amount of loan loss reserves shall not be constructed as an equivalent

reduction of the borrower’s obligation to the bank. Collection efforts on said

reserves should still be actively pursued.

Borrowers should not be informed on the reserve provided for his account.



DISCUSSION QUESTIONS

1. How does the method of repayment effect the

annual percentage rate of interest?

2. Does compounding of interest effect the annual

yield of a savings account. Explain.

3. What two federal laws have been passed to

minimize some of the confusion consumers

face when they borrow or lend money?

4. What is the Rule of 78s?



ACTIVITY

1. Give associates some other examples tocompute interest for different periods, payment

terms, and loan amounts.

2. Have associates figure the amount of moneythey would have in a year if they savedP100.00 a month at an interest rate of 3% andthe interest is compounded quarterly.

3. Have associate compute a Rule of 78s refundfor a loan of P5,000 with 36 payments of P188.38 paid out after 12 payments.