Income, Cash Flow, and Future Losses
On January L 2017, Cermack National Bank loaned 55,000,000 under a 2-year, zero coupon note to a real estate developer. The bank recognized interest revenue on this note of approximately $400,000 per year. Due to an economic downturn, the developer was unable to pay the $5,800,000
maturity amount on December 31, 2018. The bank convinced the developer to pay $800,000 on December 31, 2018, and agreed to extend $5,000,000 credit to the developer despite the gloomy economic outlook for the next several years. Thus, on December 31, 2018, the bank issued a new 2-year, zero coupon note to the developer to mature on December 31, 2020, for $6,000,000. The bank recognized interest revenue on this note of approximately $500,000 per year.
The bank’s external auditor insisted that the riskiness of the new loan be recognized by increasing the allowance for uncollectible notes by $1,500,000 on December 31, 2018, and $2,000,000 on December 31, 2019. On December 31, 20201 the bank received $1,200,000 from the developer and learned that the developer was in bankruptcy and that no additional amounts would be recovered.
Required:
1. Prepare a schedule showing annual cash flows fur the two notes in each of the 4 years.
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Cornerstones of Financial Accounting
- Income, Cash Flow, and Future Losses On January L 2017, Cermack National Bank loaned 55,000,000 under a 2-year, zero coupon note to a real estate developer. The bank recognized interest revenue on this note of approximately $400,000 per year. Due to an economic downturn, the developer was unable to pay the $5,800,000 maturity amount on December 31, 2018. The bank convinced the developer to pay $800,000 on December 31, 2018, and agreed to extend $5,000,000 credit to the developer despite the gloomy economic outlook for the next several years. Thus, on December 31, 2018, the bank issued a new 2-year, zero coupon note to the developer to mature on December 31, 2020, for $6,000,000. The bank recognized interest revenue on this note of approximately $500,000 per year. The banks external auditor insisted that the riskiness of the new loan be recognized by increasing the allowance for uncollectible notes by $1,500,000 on December 31, 2018, and $2,000,000 on December 31, 2019. On December 31, 20201 the bank received $1,200,000 from the developer and learned that the developer was in bankruptcy and that no additional amounts would be recovered. Required: Which figure, net income or net cash flow, does the better job of telling the banks stock-holders about the effect of these notes on the bank? Explain by reference to the schedules prepared in Requirements 1 and 2.arrow_forwardMarmol Corporation uses the allowance method for bad debts. During 2019, Marmol charged 50,000 to bad debt expense and wrote off 45,200 of uncollectible accounts receivable. These transactions resulted in a decrease in working capital of: a. 0 b. 4,800 c. 45,200 d. 50,000arrow_forwardLong-Term Financing Needed At year-end 2018, Wallace Landscapings total assets were 2.17 million, and its accounts payable were 560,000. Sales, which in 2018 were 3.5 million, are expected to increase by 35% in 2019. Total assets and accounts payable are proportional to sales, and that relationship will be maintained. Wallace typically uses no current liabilities other than accounts payable. Common stock amounted to 625,000 in 2018, and retained earnings were 395,000. Wallace has arranged to sell 195,000 of new common stock in 2019 to meet some of its financing needs. The remainder of its financing needs will be met by issuing new long-term debt at the end of 2019. (Because the debt is added at the end of the year, there will be no additional interest expense due to the new debt.) Its net profit margin on sales is 5%, and 45% of earnings will be paid out as dividends. a. What were Wallaces total long-term debt and total liabilities in 2018? b. How much new long-term debt financing will be needed in 2019? [Hint: AFN New stock = New long-term debt.)arrow_forward
- (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.arrow_forwardOchoa Bros. received $2 million as loan proceeds from a large bank on April 30, 2015. The market interest rate of 8% per annum is to be paid annually and the principal is to be repaid in 10 years' time if not put earlier by the bank. The bank holds a put option on the debt requiring redemption of the loan after seven years. An amount of $200,000 plus the original principal of $2 million would be repaid if the bank exercises the put. Ochoa agreed to the put option in exchange for relaxed debt covenants. Believing interest rates will fall, on April 30, 2018, Ochoa entered into an interest rate swap (at no cost). Ochoa does not opt for hedge accounting. Swap Terms Notional Amount: $2,000,000 Interest Rate on Swap: Prime + 2% payable annually Current prime rate: 6% Interest Reset Date: Every April 30 Term: 4 years Cost to enter swap: zero Additional information: RESET DATE SWAP VALUE PRIME RATE April 30, 2019 $(75,267) 7.5% April 30, 2020 $(86,198) 8.5% April 30, 2021 $zero 6%…arrow_forwardDue to extreme financial difficulties, Armada Company has negotiated a restructuring of its 10% P5,000,000 note payable due on December 31, 2021. The unpaid interest on the note on such date is P500,000. The creditor has agreed to reduce the face value to P4,000,000, forgive the unpaid interest, reduce the interest rate to 8% and extend the due date three years from December 31, 2021. 1. What is the interest expense for 2022? 2. What amount should Armada Company report as gain (loss) on extinguishment of debt in 2021?arrow_forward
- Kalibo Bank loaned P5,000,000 to Caticlan Company on January 1, 2021. The terms of the loan require principal payments of P 1,000,000 each year for 5 years plus interest at 8%. The first principal and interest payment is due on January 1, 2021. Caticlan Company made the required payments during 2022 and 2023. However, during 2023 Caticlan Company began to experience financial difficulties, requiring the Kalibo bank to reassess the collectibility of the loan. On December 31, 2020, the Kalibo bank has determined that the remaining principal payment will be collected as originally scheduled but the collection of the interest is unlikely. Kalibo Bank did not accrue the interest on Dec. 21, 2023. Present value of 1 at 8%:For one period 0.93For two periods 0.86 For three periods 0.79 3. What is the carrying amount of the loan receivable on December 31, 2024?arrow_forwardKalibo Bank loaned P5,000,000 to Caticlan Company on January 1, 2021. The terms of the loan require principal payments of P 1,000,000 each year for 5 years plus interest at 8%. The first principal and interest payment is due on January 1, 2021. Caticlan Company made the required payments during 2022 and 2023. However, during 2023 Caticlan Company began to experience financial difficulties, requiring the Kalibo bank to reassess the collectibility of the loan. On December 31, 2020, the Kalibo bank has determined that the remaining principal payment will be collected as originally scheduled but the collection of the interest is unlikely. Kalibo Bank did not accrue the interest on Dec. 21, 2023. Present value of 1 at 8%:For one period 0.93For two periods 0.86 For three periods 0.79 1. What is the impairment loss for 2023?2. What is the interest income for 2024?3. What is the carrying amount of the loan receivable on December 31, 2024?arrow_forwardKalibo Bank loaned P5,000,000 to Caticlan Company on January 1, 2021. The terms of the loan require principal payments of P 1,000,000 each year for 5 years plus interest at 8%. The first principal and interest payment is due on January 1, 2021. Caticlan Company made the required payments during 2022 and 2023. However, during 2023 Caticlan Company began to experience financial difficulties, requiring the Kalibo bank to reassess the collectibility of the loan. On December 31, 2020, the Kalibo bank has determined that the remaining principal payment will be collected as originally scheduled but the collection of the interest is unlikely. Kalibo Bank did not accrue the interest on Dec. 21, 2023. Present value of 1 at 8%:For one period 0.93For two periods 0.86 For three periods 0.79 Question: What is the carrying amount of the loan receivable on December 31, 2024?arrow_forward
- DIRECTION: Prepare an amortization table Kalibo Bank loaned P5,000,000 to Caticlan Company on January 1, 2012. The terms of the loan require principal payments of P1,000,000 each year for 5 years plus interest at 8%. The first principal and interest payment is due on January 1,2013. Caticlan Company made the required payments during 2013 and 2014. However, during 2014 Caticlan Company began to experience financial difficulties, requiring Kalibo Bank to reassess the collectibility of the loan. On December 31,2014, Kalibo Bank has determined that the remaining principal payment will be collected but the collection of the interest is unlikely. Kalibo Bank did not accrue the interest on December 31, 2014. The present value of 1 at 8% is as follows: For one period 0.926 For two periods 0.857 For three periods 0.794 Required: Prepare the amortization table of the loan after impairment.arrow_forwardDayannara Bank loaned P5,000,000 to Dama Company on January 1, 2007. The terms of the loan require principal payments of P1,000,000 each year for 5 years plus interest at 8%. The first principal and interest payment is due on December 31, 2007. Dama Company made the required payments during 2007 and 2008. However, during 2009 Dama Company began to experience financial difficulties and was not able to pay the next installment of principal and interest, this required Dayannara to reassess the collectibility of the loan. On December 31, 2009, Dayannara determined that the remaining principal payment will be collected starting December 31, 2010 but the collection of the interest is unlikely. Assume that Dayannara accrued interest on December 31, 2009 but did not continue to accrue interest because of its uncollectibillity. The present value of 1 at 8% is as follows:For one period 0.93For two periods 0.86For three periods 0.79 . What is the loan impairment loss on December 31, 2009?…arrow_forwardOn December 31, 2020, 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 2022, Majoli began to experience financial difficulty. As a result, at December 31, 2022, 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, 2020. b. Prepare the entry, if any, to record the impairment of the loan on December 31, 2022, by Paris Bank.arrow_forward
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