ST Bank granted a $1 million loan to Company A on 1 January 2015 at par. The loan is repayable in 2 years’ time and bears annual interest of 7%. A similar loan in the market normally bears interest at 9% per annum (as at 1 January 2015), however ST Bank is willing to receive a lower yield on the loan as Company A has agreed to transfer all other banking requirements solely to ST Bank. On 31 December 2015 a similar loan yields 9.5% interest. You are required to: Prepare the journal entries that ST Bank is required to process in respect of the loan for the year ended 31 December 2015. Calculate the interest income that would accrue to ST Bank during 2016.

EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN:9781337514835
Author:MOYER
Publisher:MOYER
Chapter16: Working Capital Policy And Short-term Financing
Section: Chapter Questions
Problem 14P
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ST Bank granted a $1 million loan to Company A on 1 January 2015 at par. The loan is repayable in 2

years’ time and bears annual interest of 7%. A similar loan in the market normally bears interest at

9% per annum (as at 1 January 2015), however ST Bank is willing to receive a lower yield on the loan as Company A has agreed to transfer all other banking requirements solely to ST Bank. On 31

December 2015 a similar loan yields 9.5% interest.

You are required to:

  1. Prepare the journal entries that ST Bank is required to process in respect of the loan for the year ended 31 December 2015.
  2. Calculate the interest income that would accrue to ST Bank during 2016.
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