Question

In: Accounting

On December 31, 2017, Flint Company signed a $ 1,038,100 note to Buffalo Bank. The market...

On December 31, 2017, Flint Company signed a $ 1,038,100 note to Buffalo 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, Flint’s financial situation worsened. On December 31, 2019, Buffalo Bank determined that it was probable that the company would pay back only $ 622,860 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $ 1,038,100 loan.

Determine the amount of cash Flint received from the loan on December 31, 2017.

Prepare a note amortization schedule for Buffalo Bank up to December 31, 2019.

Determine the loss on impairment that Buffalo Bank should recognize on December 31, 2019

Solutions

Expert Solution

The amount of cash received is the present value of the note
Annual Interest 1038100*9% 93429.00
Years Cash flow Discount Factor @ 11%
1 93429 0.901 $84,179.53 0.901
2 93429 0.812 $75,864.35 0.812
3 93429 0.731 $68,296.60 0.731
4 93429 0.659 $61,569.71 0.659
5 1131529 0.593 $670,996.70 0.593
$960,906.88 1038100 $77,193.12
Cash Received is $ 960906.88
Amortization Table
Years Interest Interest Expense(BV of bonds previous*11%) Amortization of Discount (Premium) (Discount) Premium Bonds Payable BV of Bonds
31/12/2017 ($77,193.12) 1038100 $960,906.88
31/12/2018 $93,429 $105,699.76 $12,270.76 ($64,922.36) 1038100 $973,177.64
31/12/2019 $93,429 $107,049.54 $13,620.54 ($51,301.82) 1038100 $986,798.18
Net realizable Value with new maturity value
Years Cash flow
31/12/2018 93429 0.901 84179.529
31/12/2019 716289 0.812 581626.668
665806.197
Impairment Loss - 986798.18 - 665806.20 $320,991.98

ekkarill92 answered 3 years ago
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