Problem
Carrier Company is preparing its financial statements for the year ended May 31, 2019. On May 1, 2018 Carrier Company made a loan of P100 million to a customer with a similar credit risk to Carrier Company. Interest payable on this loan is 4.5% per annum. The loan was recognized as a financial asset at amortized cost.
On May 31, 2018 the initial present value of expected credit losses over the life of the loan using a discount factor of 4% was P25 million. At that date, the probability of default over the next 12 months was 10%.
On May 31, 2019 it became clear that the customer was in serious financial difficulties, and the directors of Carrier believed that there was objective evidence of impairment. The present value of expected credit losses was revised to P48.1 million.
a) What amount of credit Loss Allowance should Carrier Company recognized on May 31, 2018?
b) What is the net effect in the profit or loss in 2019 before the realization that the financial asset was impaired?