Question

On December 31, 2017, Sage Company signed a $1,022,000 note to Pronghorn Bank. The market interest rate at that time was 11%. The stated interest rate on the note was 9%, payable annually. The note matures in 5 years. Unfortunately, because of lower sales, Sage’s financial situation worsened. On December 31, 2019, Pronghorn Bank determined that it was probable that the company would pay back only $613,200 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $1,022,000 loan.

Determine the amount of cash Sage received from the loan on December 31, 2017. (Round present value factors to 5 decimal places, e.g. 0.52513 and final answer to 0 decimal places, e.g. 5,275.)

Amount of cash Sage received from the loan

$enter the Amount of cash received from the loan rounded to 0 decimal places

eTextbook and Media

Prepare a note amortization schedule for Pronghorn Bank up to December 31, 2019. (Round answers to 0 decimal places, e.g. 5,275.)

Note Amortization Schedule (Before Impairment)
Date		Cash Received		Interest Revenue		Increase in Carrying Amount		Carrying Amount of Note
12/31/17
12/31/18
12/31/19

eTextbook and Media

Determine the loss on impairment that Pronghorn Bank should recognize on December 31, 2019. (Round present value factors to 5 decimal places, e.g. 0.52500 and final answer to 0 decimal places, e.g. 5,275.)

Loss due to impairment

$enter the Loss due to impairment in dollars rounded to 0 decimal places

Answer 1

As per the information given, the value of note is $1,022,000 whose maturity is 5 years.

To determine the amount which sage received, we have to take the value of note in present value discounted at market interest rate 11%

Therefore:-

Amount of cash sage received from the loan will be

$1,022,000 * 0.59345 = $606,506

Discount factor of 11% for 5th year is 0.59345

Note amortization schedule for Bank:-

Date	Cash received	Interest revenue	Increase in carrying amount	Carrying amount of note
12/31/17	Nil	Nil	Nil	$606,506 (a)
12/31/18	$91,980	$91,980	$91,530 (b-a)	$698,036 (b)
12/31/19	$91,980	$91,980	$49,240 (c-b)	$747,276 (c)

Interest revenue:- $1,022,000 * 9% = $91,980

Carrying amount is the present value of $1,022,000 with 11%

Calculation of Impairment Loss:-

Bank will receive $613,200 on maturity i.e on 12/31/22

So, its present value on 12/31/19 with 11% will be $613,200 * 0.73119 = $448,366

So, Impairment Loss that bank should recognize on 12/31/19 will be

$747,276-$448,366 = $298,910