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Hello Tutor,
lets suppose there is a loan asset = $840,000., with effective rate of interest 7.5%, the expected credit loss is $5000. .
Now interest income is 7.5% * 840,000= $63,000
in the solution to the question they have computed interest cost on expected credit loss 7.5%*$5000 = $375.
My question is why have they calculated interest cost on ECL?
Thanks.
No need to – keep it simple.
Compare the allowance b/f and the allowance c/f – difference to P&L.
Difference comprises extra possible bad debt and finance cost – but you won’t have time to split them up.
What matters is that you show the total P&L charge,
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