
1.
Calculate the value of the impaired loan on December 31, 2016.
1.

Explanation of Solution
Annuity: An annuity is referred as a sequence of payment of fixed amount of
Present Value: The value of today’s amount expected to be paid or received in the future at a compound interest rate is called as present value.
Calculate the value of the impaired loan on December 31, 2016.
Working note (1):
Calculate the present value of principal.
Note:
Present value of $1: n = 8, i =6% is taken from the table value (Table 3 at the end of the time value money module).
Working note (2):
Calculate the amount of interest.
Working note (3):
Calculate the present value of interest.
Note:
Present value of ordinary annuity of $1: n =5, i =6% is taken from the table value (Table 4 at the end of the time value money module).
Present value of $1: n = 3, i =6% is taken from the table value (Table 3 at the end of the time value money module).
Thus, the value of impaired loan on December 31, 2016 is $419,809.43.
2.
Prepare
2.

Explanation of Solution
Record the amount of accrued interest as on December 31, 2016.
Date | Account Title and Explanation | Debit | Credit |
December 31, 2016 | Cash | $30,000.00 | |
Interest income | $30,000.00 | ||
(To record the interest accrued) |
Table (1)
- Cash is an asset. It is increased. Therefore cash account is debited.
- Interest income is an income, it increases the equity. Therefore interest income account is credited.
Recognize the impairment.
Date | Account Title and Explanation | Debit | Credit |
December 31, 2016 | $80,190.57 | ||
Allowance for doubtful notes | $80,190.57 | ||
(To recognize the impairment) |
Table (2)
Working note (4):
Calculate the amount of impairment.
- Bad debt expense is an expense, it decreases the equity. Therefore Bad debt expense account is debited.
- Allowance for doubtful notes is a contra-asset, it is increased. Therefore it is credited.
Record the interest income at December 31, 2017.
Date | Account Title and Explanation | Debit | Credit |
December 31, 2017 | Allowance for doubtful notes | $25,188.57 | |
Interest income (5) | $25,188.57 | ||
(To record the interest income) |
Table (3)
Working note (5):
Calculate the amount of interest income.
- Allowance for doubtful notes is a contra-asset, it is decreased. Therefore it is debited.
- Interest income is an income, it is increased. Therefore it is credited.
Record the interest income at December 31, 2018.
Date | Account Title and Explanation | Debit | Credit |
December 31, 2018 | Allowance for doubtful notes | $26,699.88 | |
Interest income (6) | $26,699.88 | ||
(To record the interest income) |
Table (4)
Working note (6):
Calculate the amount of interest income.
- Allowance for doubtful notes is a contra-asset, it is decreased. Therefore it is debited.
- Interest income is an income, it is increased. Therefore it is credited.
Record the bad debt expense.
Date | Account Title and Explanation | Debit | Credit |
December 31, 2019 | Allowance for doubtful notes | $28,302.12 | |
Bad debt expense (7) | $28,302.12 | ||
(To reverse the bad debt expense, as the interest is expected to be paid on due date) |
Table (5)
Working note (7):
Determine the decrease in bad debt expense.
Record the interest income at December 31, 2019 through 2024.
Date | Account Title and Explanation | Debit | Credit |
December 31, 2019 | Cash | $30,000.00 | |
Interest income | $30,000.00 | ||
(To record the interest income) | |||
December 31, 2020 | Cash | $30,000.00 | |
Interest income | $30,000.00 | ||
(To record the interest income) | |||
December 31, 2021 | Cash | $30,000.00 | |
Interest income | $30,000.00 | ||
(To record the interest income) | |||
December 31, 2022 | Cash | $30,000.00 | |
Interest income | $30,000.00 | ||
(To record the interest income) | |||
December 31, 2023 | Cash | $30,000.00 | |
Interest income | $30,000.00 | ||
(To record the interest income) | |||
December 31, 2024 | Cash | $30,000.00 | |
Interest income | $30,000.00 | ||
(To record the interest income) |
Table (6)
- Cash is an asset. It is increased. Therefore cash account is debited.
- Interest income is an income, it increases the equity. Therefore interest income account is credited.
Record the collection of cash on note.
Date | Account Title and Explanation | Debit | Credit |
December 31, 2024 | Cash | $500,000.00 | |
Notes receivable | $500,000.00 | ||
(To record the collection of note) |
Table (7)
- Cash is an asset. It is increased. Therefore cash account is debited.
- Notes receivable is an asset. It is decreased. Therefore notes receivable account is credited.
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Chapter 13 Solutions
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