Preston Bank Has $50 Million of Loans Outstanding on December

Essay

Preston Bank has $50 million of loans outstanding on December 31 of the current year, in which it recorded net income of $770,000. Preston did not provide for any uncollectible loans because all of its loans are collateralized by real estate. That is, if the loans were to default, Preston would obtain the title to the real estate for which the loans were made. However, during the audit of Preston's financial statements, the auditing company determined that $5 million of the outstanding loans would probably be dishonored (uncollectible). Because during the last three years real estate values have deteriorated, they also investigated the real estate that backed these collateralized loans. The market value of that real estate is negligible.
Recalculate Preston's loans receivable on December 31 and current net income to an amount that would be acceptable to the auditors.