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In SBR Exam KIt for 2025-26 of Kaplan -Greer Scenario,
Part d about the loan
The examiner is talking about the modification of the loan and that is really understandable.
But in the model answer there was no note about how will be the treatment of the loan thereafter.How to waive the loan? what are the entries ?
DR to loan Payable CR to where ?Only the difference between the present value of the future contractual amount and the liability on 31 Dec 20×7 whas shown which has to go to profit and loss .
What about the liability which has to be waived ?Is the modification just for 31 Dec 20×7 and then the contractual cash flows and interest will start based on the present value of the modified amount which is $26,841,000.
Please clarify Sir.
Thanks.
I don’t have Kaplan materials so any answer will be brief.
If you owe 100 and a quarter of the loan is waived by the lender, you will only owe 75. You will be 25 better off..
Therefore Dr Liability Cr P&L 25.
The difference in the values of the loan liability that you describe is the waiver.
Does that solve it?
Hello Sir,
This the question
4 – Loan agreement
Greer Co took out a $27 million bank loan on 1 January 20X6, repayable after five years.
Interest is charged at 5% per annum, payable annually on 31 December. Transaction costs of
$675,000 were paid on 1 January 20X6. The effective interest rate was calculated as 5.6%.
Greer Co has negotiated a change to the terms of its loan on 31 December 20X7 at no cost.
This has resulted in the waiver of the interest payment due on that date with all other
contractual cash flows remaining payable. The modification to the financial terms of the
original bank loan is not considered substantive. The present value of the modified
contractual cash flows at the original effective interest rate is $26,841,000.————
Actually the entries ware not required in the qusetion but my aim is to understand how deal with it.So the difference after modification of the loan will go to P&L.
So the loan payable account will be 26841000 starting from 01-Jan-20×8 because it was modified.
is That okay.
The confusion is it appears that the loan is completly nullified forever which is not the case.
Thanks.
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