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 cash flows that occurs over the equal intervals of time. Cash flow occurs during the first day of each time period is known as an annuity due, whereas cash flow occurs during the last day of each time period is known as an ordinary annuity.
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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