Cornerstones of Financial Accounting
4th Edition
ISBN: 9781337690881
Author: Jay Rich, Jeff Jones
Publisher: Cengage Learning
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Chapter 11, Problem 63.3C
Income,
On January L 2017, Cermack National Bank loaned 55,000,000 under a 2-year, zero coupon note to a real estate developer. The bank recognized interest revenue on this note of approximately $400,000 per year. Due to an economic downturn, the developer was unable to pay the $5,800,000
maturity amount on December 31, 2018. The bank convinced the developer to pay $800,000 on December 31, 2018, and agreed to extend $5,000,000 credit to the developer despite the gloomy economic outlook for the next several years. Thus, on December 31, 2018, the bank issued a new 2-year, zero coupon note to the developer to mature on December 31, 2020, for $6,000,000. The bank recognized interest revenue on this note of approximately $500,000 per year.
The bank’s external auditor insisted that the riskiness of the new loan be recognized by increasing the allowance for uncollectible notes by $1,500,000 on December 31, 2018, and $2,000,000 on December 31, 2019. On December 31, 20201 the bank received $1,200,000 from the developer and learned that the developer was in bankruptcy and that no additional amounts would be recovered.
Required:
Which figure, net income or net cash flow, does the better job of telling the bank’s stock-holders about the effect of these notes on the bank? Explain by reference to the schedules prepared in Requirements 1 and 2.
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(Expected Cash Flows) On January 1, 2017, Botosan Company issued a $1,200,000, 5-year, zero-interestbearing note to National Organization Bank. The note was issued to yield 8% annual interest. Unfortunately, during 2018 Botosan fell into financial trouble due to increased competition. After reviewing all available evidence on December 31,2018, National Organization Bank decided that the loan was impaired. Botosan will probably pay back only $800,000 of the principal at maturity.Instructions(a) Prepare journal entries for both Botosan Company and National Organization Bank to record the issuance of the noteon January 1, 2017. (Round to the nearest $10.)
(b) Assuming that both Botosan Company and National Organization Bank use the effective-interest method to amortize the discount, prepare the amortization schedule for the note.(c) Under what circumstances can National Organization Bank consider Botosan’s note to be impaired?(d) Compute the loss National Organization Bank will suffer…
What is the carrying amount of the loan Receivable on December 31,2018?
What is the impairment loss to be recognized on December 31,2018?
Chapter 11 Solutions
Cornerstones of Financial Accounting
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