Question

6-67 Allowance for Credit Losses Tompkins Financial Corporation, a multibank holding company headquartered in Ithaca, New York, reported the following changes in the company's Allowance for Loan and Lease Losses account as of December 31, 2011 ($ in thousands): 2011 Reserve at beginning of year Provisions charged to operations Recoveries on loans and leases Loans and leases charged off Reserve at end of year $27,832 8,945 1,048 (10,232) $27,593 1. Terminology in bank financial statements sometimes differs slightly from that in statements of industrial companies. Explain what is meant by “allowance for loan and lease losses," "provisions charged to operations,” and “loans and leases charged off.” 2. Prepare the 2011 journal entries to record the writing off of specific credit losses, the recovery of previously written-off credit losses, and the charge for credit losses against 2011 income. Omit explanations. 3. Suppose the bank analyzed its loans at the end of 2011 and decided that an allowance for loan and lease losses equal to $30 million was required. Compute the provision that would be charged in 2011. 4. The bank had income before income taxes of $51,923,000 in 2011. Compute the income before income taxes if the reserve for loan and lease losses at the end of 2011 had been $30 million.

Answer 1

1.

“Allowance for loan and lease losses” is referred to as the reserve for bad debts to reflect credit losses within a bank’s portfolio of loans and leases.

“Provisions charged to operations” refers to banks making a provision for debts that are likely to go bad and charging it as an expense against the current period’s revenue.

“Loans and leases charged off” refers to the amount of loans and leases that are written down.

2.

Charge for credit losses against 2011 income

Particulars	Debit	Credit
Allowance for uncollectible accounts	8945000
Accounts receivable		8945000

Recovery of previously written off credit losses

Particulars	Debit	Credit
Accounts receivable	1048000
Allowance for uncollectible accounts		1048000

Write-off specific credit losses

Particulars	Debit	Credit
Allowance for uncollectible accounts	10232000
Accounts receivable		10232000

3.

Provision Required = Provision required - Year end provision

= 30000000 - 27593000

= 2407000

4.

Income before income taxes = Current income - provision

= 51923000 - 2407000

= 49516000