Question

On December 31, 2020, Teal Company signed a $1,137,500 note to Flint Bank. The market interest rate at that time was 12%. The stated interest rate on the note was 10%, payable annually. The note matures in 5 years. Unfortunately, because of lower sales, Teal’s financial situation worsened. On December 31, 2022, Flint Bank determined that it was probable that the company would pay back only $682,500 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $1,137,500 loan.

Determine the amount of cash Teal received from the loan on December 31, 2020. (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 Teal received from the loan

$enter a dollar amount of cash Teal received from the loan

eTextbook and Media

• eTextbook

Prepare a note amortization schedule for Flint Bank up to December 31, 2022. (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
12/31/20								$enter a dollar amount
12/31/21		$enter a dollar amount		$enter a dollar amount		$enter a dollar amount		enter a dollar amount
12/31/22		enter a dollar amount		enter a dollar amount		enter a dollar amount		enter a dollar amount

eTextbook and Media

Determine the loss on impairment that Flint Bank should recognize on December 31, 2022. (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

Answer 1

a.

Answer:

Cash received from Loan

$1,055,495

Calculation

Principal = 1,137,500

Interest = Principal * interest rate

That is, 1,137,500 * 10% = 113,750  

So interest is 113,750  

Now, we need to calculate the present value of the principal and the interest

Present value of principal :

PV Factor =

Based on the following:

n = 5 years

rate = 12%

So, the PV Factor is 0.56743

if using MS excel = PV(12%,5,0,1,1) = 0.56743

Present value of principal = 1,137,500 * 0.56743 = 645,452

Present value of interest:

PV Factor =

Based on the following:

n = 5 years

rate = 12%

So, the PV Factor is 3.60478

if using MS excel = PV(12%,5,1,0,0) = 3.60478

Present value of interest = 113,750 * 3.60478 = 410,043

Add both Present value of principal and Present value of interest to get the cash received:

Present value of principal	$645,452
Present value of interest	$410,044
Cash received	$1,055,495

b.

Answer:

Date	Cash Received 1,137,500 * 10% (A)	Interest Revenue Carrying amount *12% (B)	Increase in Carrying Amount (C) = (B)-(A)	Carrying Amount of Note (D)= (D)+(C)
12/31/20				$1,055,495
12/31/21	113,750	$126,659	$12,909	$1,068,405
12/31/22	113,750	$128,209	$14,459	$1,082,863

Calculation:

Cash Received = 1,137,500 * 10% = 113,750  

This will be same throughout the periods

Interest Revenue :

Cash received = 1,055,495

So the cash received amount calculated will be the beginning carrying amount.

And for calculating the interest revenue, we need to multiply the carrying value with the interest rate.

= 1,055,495  * 12% = 126,659

We need to calculate it based on the carrying value for the rest of the years too. As the carrying value changes through the periods, interest revenue too changes. But interest rate will 12% for all the years.

Increase in Carrying Amount

Increase in Carrying Amount = Interest Revenue - Cash Received

So, 126,659 - 113,750 = 12,909

This step is also need to be repeated for the next years.

Carrying Amount of Note

Initial carrying amount is the cash received amount . That is 1,055,495

Then we need to add the Increase in Carrying Amount to previous carrying amount to get the current carrying amount.

So for 12/31/21 :

1,055,495 + 12,909 = 1,068,405

c.

Answer:

Loss due to impairment

323,865

Calculation

Carrying amount of loan (12/31/22) = 1,082,863

Then, we need to calculate the Present value of pay back amount due in 3 years

Pay back Amount = 682,500

PV Factor =

Based on the following:

n = 3 years

rate = 12%

So, the PV Factor is 0.71178

if using MS excel = PV(12%,3,0,1,1) = 0.71178

So, Present value of $682,500 due in 3 years = 682,500 * 0.71178 = 485,790

Then, we need to calculate the Present value of interest payable annually for 3 years:

Interest = 113,750

PV Factor =

Based on the following:

n = 3 years

rate = 12%

So, the PV Factor is 2.40183

if using MS excel = PV(12%,3,1,0,0)) = 2.40183

So, Present value of $113,750 due in 3 years = 113,750 * 2.40183 = 273,208

Next, we need to deduct the total of both these present value amounts we calculated from the carrying value of 12/31/2022:

Carrying amount of loan (12/31/22)		$1,082,863
Less: Present value of 682,500 due in 3 years	485,790
Present value of $113,750 payable annually for 3 years	273,208
		758,998
Loss due to impairment		$323,865

So, the loss due to impairment is 323,865