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Chapter 7: Question E7-26 (page 370)

(Expected Cash Flows) On December 31, 2017, Iva Majoli Company borrowed \(62,092 from Paris Bank, signing a 5-year, \)100,000 zero-interest-bearing note. The note was issued to yield 10% interest. Unfortunately, during 2019, Majoli began to experience financial difficulty. As a result, at December 31, 2019, Paris Bank determined that it was probable that it would receive back only $75,000 at maturity. The market rate of interest on loans of this nature is now 11%.

Instructions

(a) Prepare the entry to record the issuance of the loan by Paris Bank on December 31, 2017.

(b) Prepare the entry, if any, to record the impairment of the loan on December 31, 2019, by Paris Bank.

Short Answer

Expert verified

Impairment loss totals$18,784.

Step by step solution

01

Definition of Impairment Loss

The loss recognized by the business entity in the condition where the fair market value of any asset is lower than the value reported in the balance sheet is known as an impairment loss.

02

Journal Entry for Issuance of Loan

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2017

Note receivable

$100,000

Discount on note receivable

$37,908

Cash

$62,092

03

Journal Entry for Impairment of Loan

Date

Accounts and Explanation

Debit $

Credit $

31 Dec 2019

Bad debt expenses

$18,784

Allowance for bad debts

$18,784

Working note:

Date

Cash Received

Interest revenue

Increasing in carrying amount

Carrying amount of note

31 Dec 2017

$62,092

31 Dec 2018

0

$6,209

$6,209

$68,301

31 Dec 2019

0

$6,830

$6,830

$75,131

Calculation of impairment loss:

Particular

Amount $

Carrying amount on 31 Dec 2019

$75,131

Less: Present value of $75,000 in 3years @ 10% (PVAF: 0.7513)

(56,347)

Impairment loss

$18,784

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Most popular questions from this chapter

On July 1, 2017, Moresan Company sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Moresan will receive interest at the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on June 30, 2018.

On September 1, 2017, Moresan sold special-order merchandise on credit and received in return a zero-interest-bearing note receivable from the customer. The prevailing rate of interest for a note of this type is determinable. The note receivable is due in one lump sum on August 31, 2019.

Moresan also has significant amounts of trade accounts receivable as a result of credit sales to its customers. On October 1, 2017, some trade accounts receivable were assigned to Indigo Finance Company on a non-notification (Moresan handles collections) basis for an advance of 75% of their amount at an interest charge of 8% on the balance outstanding.

On November 1, 2017, other trade accounts receivable were sold without recourse. The factor withheld 5% of the trade accounts receivable factored as protection against sales returns and allowances and charged a finance charge of 3%.

Instructions

How should Moresan account for subsequent collections on the trade accounts receivable assigned on October 1, 2017, and the payments to Indigo Finance? Why?

The following are a series of unrelated situations. 1. Halen Company’s unadjusted trial balance at December 31, 2017, included the following accounts.

Debit \(

Credit \)

Accounts receivables

\(53,000

Allowance for doubtful accounts

4,000

Net sales

\)1,200,000

Halen Company estimates its bad debt expense to be 7% of gross accounts receivable. Determine its bad debt expense for 2017.

2. An analysis and aging of Stuart Corp. accounts receivable at December 31, 2017, disclosed the following.

Amounts estimated to be uncollectible

\(180,000

Accounts receivables

1,750,000

Allowance for doubtful accounts (per books)

125,000

What is the net realizable value of Stuart’s receivables at December 31, 2017?

3. Shore Co. provides for doubtful accounts based on 4% of gross accounts receivable, The following data are available for 2017.

Credit sales during 2017

\)4,400,000

Bad debt expenses

57,000

Allowance for doubtful accounts 1/1/17

17,000

Collection of accounts written off in prior years (Customer credit was re-established)

8,000

Customer accounts written off as uncollectible during 2017

30,000

What is the balance in Allowance for Doubtful Accounts at December 31, 2017?

4. At the end of its first year of operations, December 31, 2017, Darden Inc. reported the following information.

Accounts receivable, net of allowance for doubtful accounts

\(950,000

Customer accounts written off as uncollectible during 2017

24,000

Bad debt expense for 2017

84,000

What should be the balance in accounts receivable at December 31, 2017, before subtracting the allowance for doubtful accounts?

5. The following accounts were taken from Bullock Inc.’s trial balance at December 31, 2017.

Debit

Credit

Net credit sales

\)750,000

Allowance for doubtful accounts

$14,000

Accounts receivables

310,000

If doubtful accounts are 3% of accounts receivable, determine the bad debt expense to be reported for 2017.

Instructions

Answer the questions relating to each of the five independent situations as requested.

Use the information from BE7-2, assuming Restin Co. uses the net method to account for cash discounts. Prepare the required journal entries for Restin Co.

Corrs Wholesalers Co. sells industrial equipment for a standard 3-year note receivable. Revenue is recognized at time of sale. Each note is secured by a lien on the equipment and has a face amount equal to the equipment’s list price. Each note’s stated interest rate is below the customer’s market rate at date of sale. All notes are to be collected in three equal annual installments beginning one year after sale. Some of the notes are subsequently sold to a bank with recourse, some are subsequently sold without recourse, and some are retained by Corrs. At year end, Corrs evaluates all outstanding notes receivable and provides for estimated losses arising from defaults.

Instructions

What is the appropriate valuation basis for Corrs’s notes receivable at the date it sells equipment?

Your accounts receivable clerk, Mitra Adams, to whom you pay a salary of \(1,500 per month, has just purchased a new Acura. You decide to test the accuracy of the accounts receivable balance of \)82,000 as shown in the ledger.

The following information is available for your first year in business.

(1) Collection from customer $198,000.

(2) Merchandise purchased 320,000.

(3) Ending merchandise inventory by 90,000.

(4) Goods are marked to sell at 40% above cost.

Instructions

Compute an estimate of the ending balance of accounts receivable from customers that should appear in the ledger and any apparent shortages. Assume that all sales are made on the account.
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