Question

On December 31, 2018, Isiah Company, a financing institution lent P4,000,000 to Psalms Corp. due 3 years after. The loan is supported by an 8% note receivable. Transaction costs incurred to originate the loan amounted to P248,000. P374,000 was chargeable to Psalms as origination fees. Interests on the loan are collectible at the end of each year. The yield rate on the loan is 9.25%.

Isiah was able to collect interest as it became due at the end of 2019. During 2020, however, due to Psalms Corporation’s business deterioration and due to political instability and faltering global economy, the company was not able to collect amounts due at the end 2020. After reviewing all available evidence at December 31, 2020, Isiah Company determined that it was probable that Psalms would pay back only P3,400,000 collectible as follows:

December 31, 2022	1,400,000
December 31, 2023	1,000,000
December 31, 2024	600,000
December 31, 2025	400,000

As of December 31, 2020, the prevailing rate of interest for all debt instruments is 14%.

Questions: 1-A.

1. What is the impairment loss to be recognized in the 2020 statement of comprehensive income? .

2. What is the correct carrying value of the loans receivable as of December 31, 2022?

write your solution and explanation, please. thanks.

Answer 1

Answer:

Impairment loss to be recognized on 2020: 1,656,188

Carrying value of the loans receivable as of Dec. 31, 2022: 1,724,789

Step by step:

Impairment loss is computed as the difference between the carrying amount of the receivable (including any unpaid interest) and the present value of the expected future cash flows.

.

To get the carrying amount of the loans receivable on Dec 31, 2020, amortize first the receivable. As illustrated from the amortization table, the carrying amount of the loan including the unpaid interest of 320,000 is 4,274,237. On the other hand, the PV of expected future cash flows is 2,618,049. The cash flows are discount using the original effective rate instead of the prevailing interest rate on Dec 31, 2020. Based on the computations, the impairment loss is 1,656,188.

To get the carrying amount of the loans on Dec. 31, 2022, simply amortize the reconstructed loan agreement. There will be no interest payment, as such the carrying amount of the receivable increases by the amount of the interest income and decreases by the amount of principal payment. The carrying amount of the receivable as of Dec 31, 2022 is 1,724,789.