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Question E7-26

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Intermediate Accounting (Kieso)
Found in: Page 370

Short Answer

(Expected Cash Flows) On December 31, 2017, Iva Majoli Company borrowed $62,092 from Paris Bank, signing a 5-year, $100,000 zero-interest-bearing note. The note was issued to yield 10% interest. Unfortunately, during 2019, Majoli began to experience financial difficulty. As a result, at December 31, 2019, Paris Bank determined that it was probable that it would receive back only $75,000 at maturity. The market rate of interest on loans of this nature is now 11%.

Instructions

(a) Prepare the entry to record the issuance of the loan by Paris Bank on December 31, 2017.

(b) Prepare the entry, if any, to record the impairment of the loan on December 31, 2019, by Paris Bank.

Impairment loss totals $18,784.

See the step by step solution

Step by Step Solution

Definition of Impairment Loss

The loss recognized by the business entity in the condition where the fair market value of any asset is lower than the value reported in the balance sheet is known as an impairment loss.

Journal Entry for Issuance of Loan

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2017

Note receivable

$100,000

Discount on note receivable

$37,908

Cash

$62,092

Journal Entry for Impairment of Loan

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2019

Bad debt expenses

$18,784

Allowance for bad debts

$18,784

Working note:

Date

Cash Received

Interest revenue

Increasing in carrying amount

Carrying amount of note

31 Dec 2017

$62,092

31 Dec 2018

0

$6,209

$6,209

$68,301

31 Dec 2019

0

$6,830

$6,830

$75,131

Calculation of impairment loss:

Particular

Amount $

Carrying amount on 31 Dec 2019

$75,131

Less: Present value of $75,000 in 3years @ 10% (PVAF: 0.7513)

(56,347)

Impairment loss

$18,784

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