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    Question

    When a stressed loan is sold or transferred by a lender

    to an Asset Reconstruction Company (ARC) at a price below its Net Book Value (NBV), what accounting treatment should the lender follow?
    A Debit the shortfall to the profit and loss account Correct Answer Incorrect Answer
    B Reverse the excess provision on transfer to the profit and loss account Correct Answer Incorrect Answer
    C Credit the difference to the capital reserve account Correct Answer Incorrect Answer
    D Create a separate provision for the shortfall Correct Answer Incorrect Answer
    E None of the above Correct Answer Incorrect Answer

    Solution

    • Net Book Value (NBV): Refers to the outstanding balance of a loan after deducting provisions already made. • If a stressed loan is transferred to an ARC at a price lower than NBV, the difference (shortfall) must be debited to the profit and loss account of that financial year. • If the transfer price is higher than NBV, any excess provision earlier made can be reversed to the profit and loss account.

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