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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.
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Question & Answer: The Business Development Corporation (BDC), a federal agency (fictitious), makes loans to high-tech companies that satisfy specified criteria……
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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 | |||||
