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The Business Development Corporation (BDC), a federal agency (fictitious), makes loans to high-tech companies that satisfy specified criteria. The loans are intended to encourage research and development and are made at rates substantially below market.
The BDC made a loan of $100,000nto Interface Networks, Inc. The interest rate was 6 percent, and the loan was payable over a three-year period in equal installments of $37,411. At the time of the loan, prevailing Treasury interest rates for loans of comparable maturities were 10 percent.
1. What was the amount of the loan subsidy?
2. How and when should the agency recognize the value of the subsidy? Explain.
3. Prepare a journal entry to record the loan and recognize the subsidy.
Expert Answer
| Principal | 1,00,000 | |||||
| Rate of Interest | 6.00% | |||||
| Years | 3 | |||||
| Yearly Payment with subsidy= | ||||||
| =(100000*6%*(1+6%)^3)/((1+6%)^3-1) | 37,410.98 | |||||
| Yearly payment with Subsidy | ||||||
| =(100000*10%*(1+10%)^3)/((1+10%)^3-1) | 40,211.48 | |||||
| Year | EYI | Int at 6% | Balance | |||
| 1,00,000.00 | ||||||
| 1 | 37,410.98 | 6,000.00 | 68,589.02 | |||
| 2 | 37,410.98 | 4,115.34 | 35,293.38 | |||
| 3 | 37,410.98 | 2,117.60 | 0.00 | |||
| A | 12,232.94 | |||||
| Year | EYI | Int at 10% | Balance | |||
| 1,00,000.00 | ||||||
| 1 | 40,211.48 | 10,000.00 | 69,788.52 | |||
| 2 | 40,211.48 | 6,978.85 | 36,555.89 | |||
| 3 | 40,211.48 | 3,655.59 | 0.00 | |||
| B | 20,634.44 | |||||
| Calculation of Subsidy | Year wise amount | |||||
| Year | 6% | 10% | Subsidy | |||
| 1 | 6,000.00 | 10,000.00 | 4,000.00 | |||
| 2 | 4,115.34 | 6,978.85 | 2,863.51 | |||
| 3 | 2,117.60 | 3,655.59 | 1,537.99 | |||
| 12,232.94 | 20,634.44 | 8,401.50 | ||||
| Loan subsidy expenses should be debited at the time of graning the loan by creating the reserve and which is to be adjusted yearwise as when interest become receivable | ||||||
| a journal entry to record the loan and recognize the subsidy. | ||||||
| Loan receivable | $100,000 | |||||
| Loan subsidy expense | 8,401.50 | |||||
| Cash | $100,000 | |||||
| Subsidy allowance | 8,401.50 | |||||
