Question

At January 1, 2018, Lewis Enterprises has the following individual notes receivable that it is considering for impairment:

A $2 million note (including accrued interest) from Bebko Inc. Lewis believes it is probable that Bebko will default on the note, and calculates the net realizable value of the receivable to be $1.4 million.

A $3 million note (including accrued interest) from Dutta Associates. Lewis believes it is possible but not probable that Dutta will default on the note, and calculates the net realizable value of the receivable to be $2.5 million.

Required

Determine the amount of credit losses that Lewis would recognize for these two loans. (Round your final answers to 1 decimal place.)

Bebko Inc. ? million

Dutta Associate . ? million

Answer 1

Determine the amount of credit losses that Lewis would recognize for these two loans?

Answer: Bebko Inc. – $0.6 Million

            Dutta Associates – $0 Million

Case 1: A $2 million note (including accrued interest) from Bebko Inc. Lewis believes it is probable that Bebko will default on the note, and calculates the net realizable value of the receivable to be $1.4 million.

Explanation: Here Lewis says that the bebko default of note is probable and as per the provisions when a loss is probable we should record the loss from the same to the extent we know. Here the net realizable value is $1.4 million then the loss arising from the same is $0.6 million.

Case 2: A $3 million note (including accrued interest) from Dutta Associates. Lewis believes it is possible but not probable that Dutta will default on the note, and calculates the net realizable value of the receivable to be $2.5 million.

Explanation: As per the provisions a loss to be recognized only when it is probable, here the probable means that the event will occur is greater than the probability that the event will not occur.

Here the lewis believes it as possible but not probable, no loss to be recognized.