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Chapter 7: Question E7-27 (page 370)

(Expected Cash Flows) On December 31, 2017, Conchita Martinez Company signed a \(1,000,000 note to Sauk City Bank. The market interest rate at that time was 12%. The stated interest rate on the note was 10%, payable annually. The note matures in 5 years. Unfortunately, because of lower sales, Conchita Martinez’s financial situation worsened. On December 31, 2019, Sauk City Bank determined that it was probable that the company would pay back only \)600,000 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $1,000,000 loan.

Instructions

(a) Determine the amount of cash Conchita Martinez received from the loan on December 31, 2017.

(b) Prepare a note amortization schedule for Sauk City Bank up to December 31, 2019.

(c) Determine the loss on impairment that Sauk City Bank should recognize on December 31, 2019.

Short Answer

Expert verified

The business entity incurs an impairment loss of$284,251.

Step by step solution

01

Definition of Carrying Value

Carrying value can be defined as thevalue of the assets or liabilities on which it is reported in the statement of financial position. This information helps users of financial statements determine the true value of assets and liabilities.

02

Amount of Cash Received from Loan

Particular

Amount $

Present value of principal ($1,000,000 @12% for 5 years) (PVF: 0.5674)

$567,400

Present value of interest ($100,000 @12% for 5 years) (PVAF: 3.60)

360,000

Cash received

$927,400

03

Note Amortization Schedule

Date

Cash Received (10%)

Interest expenses (12%)

Increase in Carrying amount

Carrying value

31 Dec 2017

0

0

0

$927,400

31 Dec 2018

$100,000

$111,288

$11,288

$938,688

31 Dec 2019

$100,000

$112,643

$12,643

$951,331

04

Loss Due to Impairment

Particular

Amount $

Carrying value of loan on 31 Dec 2019

$951,331

Less: Present value of $600,000 @12% for 3 years (PVF: 0.7118)

(427,080)

Less: Present value of interest $100,000 @12% for 3 years (PVAF: 2.4)

(240,000)

Impairment loss

$284,251

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Most popular questions from this chapter

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

Instructions

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

(b) Prepare the entry on March 31, 2020, if Paris learns that Firth will be able to repay the loan under the original terms.

Finman Company designated Jill Holland as petty cash custodian and established a petty cash fund of \(200. The fund is reimbursed when the cash in the fund is at \)15, which it is. Petty cash receipts indicate funds were disbursed for office supplies \(94 and miscellaneous expense \)87. Prepare journal entries for the establishment of the fund and the reimbursement.

(Assigning Accounts Receivable) On April 1, 2017, Rasheed Company assigns \(400,000 of its accounts receivable to the Third National Bank as collateral for a \)200,000 loan due July 1, 2017. The assignment agreement calls for Rasheed to continue to collect the receivables. Third National Bank assesses a finance charge of 2% of the accounts receivable, and interest on the loan is 10% (a realistic rate of interest for a note of this type).

Instructions

(a) Prepare the April 1, 2017, journal entry for Rasheed Company.

(b) Prepare the journal entry for Rasheed’s collection of $350,000 of the accounts receivable during the period from April 1, 2017, through June 30, 2017.

(c) On July 1, 2017, Rasheed paid Third National all that was due from the loan it secured on April 1, 2017. Prepare the journal entry to record this payment.

(Journalizing Various Receivable Transactions) The trial balance before adjustment for Phil Collins Company shows the following balances.

Debit

Credit

Accounts receivables

\(82,000

Allowance for doubtful accounts

\)2,120

Sales revenue

\(430,000

Instructions

Using the data above, give the journal entries required to record each of the following cases. (Each situation is independent.)

1. To obtain additional cash, Collins factors without recourse \)25,000 of accounts receivable with Stills Finance. The finance charge is 10% of the amount factored.

2. To obtain a 1-year loan of \(55,000, Collins pledges \)65,000 of specific receivable accounts to Crosby Financial. The finance charge is 8% of the loan; the cash is received and the accounts turned over to Crosby Financial.

3. The company wants to maintain the Allowance for Doubtful Accounts at 5% of gross accounts receivable.

4. Based on an aging analysis, an allowance of \(5,800 should be reported. Assume the allowance has a credit balance of \)1,100.

Kraft Enterprises owns the following assets at December 31, 2017.

Cash in bank – saving account

68,000

Checking account balance

17,000

Cash on hand

9,300

Post-dated Checks

750

Cash refunded due from IRS

31,400

Certificate of deposits (180-days)

90,000

What amount should be reported as cash?
See all solutions

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