1.
Prepare the value of impaired loan on December 31, 2016.
1.
Explanation of Solution
Compute the value of impaired loan as on December 31, 2016.
Particulars | Amount (A) | Present value factor (B) | Present value factor (C) |
Value of the Bonds (A × B × C) | |
Present value of principal | $200,000 | 0.711780 | $142,356.00 | ||
Add: Present value of interest | $24,000 | 1.690051 | 0.892857 | $36,215.37 | |
The value of impaired loan | $178,571.37 |
Table (1)
Note: The Present value of an ordinary annuity of $1 for 3 periods at 12% is 1.690051 (refer Table 4 in TVM Module). And the present value of $1 for 3 periods at 6% is 0.711780, and the present value of $1 for 1 periods at 12% is 0.892857 (refer Table 3 in TVM Module).
Working note:
(1)Calculate present value interest amount.
Therefore, the value of impaired loan amount is $178,571.37.
2.
Prepare
2.
Explanation of Solution
Troubled Debt Restructuring:
A troubled debt restructuring happens if a creditor, for legal or economic reasons associated to a debtor’s financial complications, grants a concession to a debtor that would not be otherwise considered.
Prepare journal entries to record 2016 to 2024 for the bank to record the given events, assume Company P makes all required payments under the modified agreement.
Date | Account titles and Explanation | Debit | Credit |
December 31, 2016 | Interest receivable | $24,000 | |
Interest revenue | $24,000 | ||
(To record | |||
December 31, 2016 | Bad debt expense (1) | $45,428.63 | |
Interest receivable | $24,000 | ||
Allowance for doubtful notes | $21,428.63 | ||
(To record adjusting entry to record | |||
December 31, 2017 | Allowance for doubtful notes (2) | $21,428.63 | |
Interest revenue | $21,428.63 | ||
(To record adjustment entry to record allowance for doubtful notes) | |||
December 31, 2018 | Interest receivable | $24,000 | |
Interest revenue | $24,000 | ||
(To record adjusting entry to record interest receivable) | |||
December 31, 2018 | Bad debt expense (3) | $12,000 | |
Cash | $12,000 | ||
Interest receivable | $24,000 | ||
(To record adjustment entry to record bad debts expense) | |||
January 2, 2019 | Loss on restructured loan (4) | $28,822.03 | |
Notes receivable | $28,822.03 | ||
(To record loss on restructured loan) | |||
December 31, 2019 | Cash | $12,000 | |
Notes receivable | $8,541.36 | ||
Interest revenue (6) | $20,541.36 | ||
(To record bank recognizes interest revenue) | |||
December 31, 2020 | Cash | $12,000 | |
Notes receivable | $9,566.32 | ||
Interest revenue (7) | $21,566.32 | ||
(To record bank recognizes interest revenue) | |||
December 31, 2021 | Cash | $12,000 | |
Notes receivable | $10,714.35 | ||
Interest revenue (8) | $22,714.35 | ||
(To record bank recognizes interest revenue) | |||
December 31, 2021 | Cash | $200,000 | |
Notes receivable | $2,000,000 | ||
(To record cash received for issuing notes receivable) |
Table (2)
Working notes:
(1)Calculate bad debts expense.
(2)Calculate allowance for doubtful notes.
(3)Calculate bad debts expense.
(4)Calculate loss on restructured loan.
(5)Calculate value of restructured loan.
Particulars | Amount (A) | Present value factor (B) | Value of the Bonds (A × B) |
Present value of principal | $200,000 | 0.711780 | $142,356.00 |
Add: Present value of interest ($200,000 × 12%) | $12,000 | 2.401831 | $28,821.97 |
Value of restructured loan | $171,177.97 |
Table (1)
Note: The Present value of an ordinary annuity of $1 for 3 periods at 12% is 2.401831 (refer Table 4 in TVM Module). And the present value of $1 for 3 periods at 12% is 0.711780 (refer Table 3 in TVM Module).
(6)Calculate interest revenue.
(7)Calculate interest revenue.
(8)Calculate interest revenue.
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Chapter 14 Solutions
Intermediate Accounting: Reporting and Analysis
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