$$\begin{array} { l l l l }
\text { Securities (at par) } & \$ 250 & \text { Deposits } & \$ 975 \
\text { Loans (at par) } & \$ 760 & \text { Capital } & \$ 35
\end{array}$$
-Given that 25 percent of the loans have been identified as problem loans, and if historical cost accounting methods allow the bank to write down only 10 percent of the problem loans, what will be the book value of capital?

Question

$$\begin{array} { l l l l } 
\text { Securities (at par) } & \$ 250 & \text { Deposits } & \$ 975 \
\text { Loans (at par) } & \$ 760 & \text { Capital } & \$ 35
\end{array}$$
-Given that 25 percent of the loans have been identified as problem loans, and if historical cost accounting methods allow the bank to write down only 10 percent of the problem loans, what will be the book value of capital?

Quizplus · Accepted Answer

The bank can write down 10% of the 25% problem loans, which is 2.5% of total loans. This amounts to $19 million (2.5% of $760 million). The book value of capital is then $35 million - $19 million = $16 million.

-Given That 25 Percent of the Loans Have Been Identified