Question

On January 1, 2020, Uniform Co. sold its 2-year old equipment to XYZ Inc. for a cash down-payment of P100,000 and a non-interest bearing note with a face amount of P900,000 due December 31, 2021. There is no established price for the equipment but its carrying amount on the company’s books was at P600,000. The prevailing market rate of interest for similar note of this type on the transaction date was at 10%. On December 31, 2020 XYZ developed a financial difficulty and it was apparent that it will no longer be able to settle the amount due on December 31, 2021. To maximize the recovery of the note, Uniform agreed to extend the maturity of the note to up to December 31, 2022.  Furthermore, Uniform also agreed to reduce the principal amount by 25%.

How much is the impairment loss to be recognized on the note in 2020?

342,149

204,545

260,331

286,364

Answer 1

The note would be initially recorded at its present value based on the market interest rate factor of 10%.

PV Factor for 2 years @ 10% is 1/ (1+10%)² = 0.826446

Hence, Note value on the date of initial recognition as on January 1, 2020 is $900,000 * 0.826446 = $743,801.65 (Approx.)

Interest income on this would be recorded for the year 2020 @10% and the closing value as on December 31, 2020 would become $743,801.65 + ($743,801.65 * 10%) = $ 818,181.82 (Approx.)

Now, based on restructuring of the note, as on December 31, 2020, the remaining time to maturity is 2 years based on the due date of December 31, 2022 and the face value has reduced by 25% implying a revised face value of $900,000 * 75% = $675,000

Now, after restructuring, the present value of the note comes out to $675,000 * PV Factor (10%,2 Years) = $675,000 * 0.826446 = $557,851.24

Impairment loss on Note for 2020 = $ 818,181.82 - $557,851.24 = $260,330.58 or $260,331 (Approx.)

Hence, the correct option is C $ 260,331.

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