Bank received S1,000,000 cash for a certificate of deposit. The CD has a 3-year

ID: 2588211 • Letter: B

Question

Bank received S1,000,000 cash for a certificate of deposit. The CD has a 3-year maturity and a 5% interest rate and only makes payments at maturity. Immediately, the proceeds from this CD used, plus equity, to issue a 4-year commercial loan. The bank gave out $1,200,000 cash for this loan which was priced to yield 8%, and will be paid back in 4 equal annual installments. These are the only two securities that the bank has (other than equity Prepare a balance sheet based on the information above, the two securities and equity, to help in calculating how much equity does the bank have? (a) p wih deals and es i'it pplicablpleyitunderstand not only the answer.

Explanation / Answer

Assets

Liabilities & Equity

Loans

1200000

Deposits

1000000

Equity

200000

1200000

Working Note & Explanation;

Accounting equation is as follow;

Assets = Equity + Liabilities

So in every condition this equation must be equal and correct. Now let’s see the information of the question on this eqation;

Bank received cash $1000000 for a certificate of deposit it means that bank have liabilities of $1000000, so this amount will be shown as liabilities.

Bank gave a 4 year commercial loan of $1200000, so it will be shown as an assets in the balance sheet.

So as per equation; (Assets = Liabilities + Equity). That is why equity will be calculated as follow;

$1200000 = $1000000 + Equity

Thus equity = $1200000 – $1000000 = $200000.

Balance of cash will be zero because as much cash bank received have been given as loan.