Chapter 9, Problem 2SSC

Surfing the Standards Case 2: Costs Associated with Receivables

ABC Lending signed a loan agreement with AMRO, Inc. on January 2. 2017. AMRO is borrowing $500,000 for 10 years with a stated interest rate of 7%. AMRO will make a payment of $71,188. 75 at the end of each year AMRO paid $10,000 in points to ABC Lending on January 2, 2017.

In connection with this transaction ABC Lending paid fees to a third party for loan processing. These fees were 0.5% of the loan balance ABC Lending also paid a bonus to an employee of 1% of the loan balance. Finally, ABC paid advertising costs of $1,500 and incurred expenses of $2,000 related to the preparation of the loan documents.

Prepare a memo to the file regarding the correct accounting treatment for this transaction for ABC Lending. Use the Codification for support.