Question

On December 31, 2020, Bramble Company borrowed $60,888 from Paris Bank, signing a 5-year, $102,600 zero-interest-bearing note. The note was issued to yield 11% interest. Unfortunately, during 2022, Bramble 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 $76,950 at maturity. The market rate of interest on loans of this nature is now 12%.

Prepare the entry to record the issuance of the loan by Paris Bank on December 31, 2020. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 5,275. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2020

List of Accounts

  

  

Prepare the entry, if any, to record the impairment of the loan on December 31, 2022, by Paris Bank. (Round present value factor calculations to 5 decimal places, e.g. 1.25124 and final answers to 0 decimal places, e.g. 5,275. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Date	Account Titles and Explanation	Debit	Credit
Dec. 31, 2022

Answer 1

Required 1

Present value of $102600 at December 31, 2020 = $102600 / (1.115)

= $60888

which is equal to the amount paid in cash.

Thus the entry would be:

Date	Accounts and explanation	Debit	Credit
Dec 31, 2020	Note Receivable	$           60,888
	Cash		$           60,888
	(to record issuance of note for cash)

Required 2

At December 31, 2022 the Paris Bank now estimates that it would receive $76,950 at maturity and the market interest rate is 12%.

Thus Present Value of $76,950 as at December 31, 2022 = $76,950 / (1.123)

= $54,772

The value of the notes receivable as at December 31, 2022 = $60,888 * 1.112

= $75,020

Thus Paris bank will have to record an impairment loss of = $75,020 -$54,772 = $20,248

The entry would be:

Date	Accounts and explanation	Debit	Credit
Dec 31, 2022	Impairment Loss	$           20,248
	Note Receivable		$           20,248
	(to record impairment loss on notes receivable)

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