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

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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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

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