Loan Receivable Coundon Ltd, a key supplier of the Eldon plc group, experienced cash flow difficulties during 2022. On 1 October 2022, Eldon plc provided a five-year £10 million loan to Coundon Ltd at an effective rate of interest of 5% per annum to protect its supply chain. The loan was repayable in five equal annual instalments in arrears, starting on 30 September 2023. Eldon plc’s business model was to collect all of the underlying cash flows of interest and principal. On 1 October 2022, the present value of expected credit losses over the duration of the loan (based on a 4% discount factor) was £500,000. Eldon plc estimated the probability of default in the next 12 months was 20%. During 2023, Coundon Ltd’s financial difficulties worsened, and the company was unable to pay its first loan instalment due on 30 September 2023. Eldon plc’s directors believe that the default represents objective evidence of impairment. The present value of the lifetime credit losses was revised to £5 million on 30 September 2023. Advise the directors of Eldon plc on the accounting treatment of loan receivable for the year ended 30 September 2023.
Loan Receivable Coundon Ltd, a key supplier of the Eldon plc group, experienced cash flow difficulties during 2022. On 1 October 2022, Eldon plc provided a five-year £10 million loan to Coundon Ltd at an effective rate of interest of 5% per annum to protect its supply chain. The loan was repayable in five equal annual instalments in arrears, starting on 30 September 2023. Eldon plc’s business model was to collect all of the underlying cash flows of interest and principal. On 1 October 2022, the present value of expected credit losses over the duration of the loan (based on a 4% discount factor) was £500,000. Eldon plc estimated the probability of default in the next 12 months was 20%. During 2023, Coundon Ltd’s financial difficulties worsened, and the company was unable to pay its first loan instalment due on 30 September 2023. Eldon plc’s directors believe that the default represents objective evidence of impairment. The present value of the lifetime credit losses was revised to £5 million on 30 September 2023. Advise the directors of Eldon plc on the accounting treatment of loan receivable for the year ended 30 September 2023.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Loan Receivable
Coundon Ltd, a key supplier of the Eldon plc group, experienced cash flow difficulties during 2022. On
1 October 2022, Eldon plc provided a five-year £10 million loan to Coundon Ltd at an effective rate of
interest of 5% per annum to protect its supply chain.
The loan was repayable in five equal annual instalments in arrears, starting on 30 September 2023.
Eldon plc’s business model was to collect all of the underlying cash flows of interest and principal. On
1 October 2022, the present value of expected credit losses over the duration of the loan (based on a
4% discount factor) was £500,000. Eldon plc estimated the probability of default in the next 12 months
was 20%.
During 2023, Coundon Ltd’s financial difficulties worsened, and the company was unable to pay its first
loan instalment due on 30 September 2023. Eldon plc’s directors believe that the default represents
objective evidence of impairment. The present value of the lifetime credit losses was revised to £5
million on 30 September 2023.
Advise the directors of Eldon plc on the accounting treatment of loan receivable for the year ended 30
September 2023.
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