On December 31, 2014, Conchita Martinez Company signed a $1,090,000 note to Sauk

Question

On December 31, 2014, Conchita Martinez Company signed a $1,090,000 note to Sauk City Bank. The market interest rate at that time was 11%. The stated interest rate on the note was 9%, payable annually. The note matures in 5 years. Unfortunately, because of lower sales, Conchita Martinez’s financial situation worsened. On December 31, 2016, Sauk City Bank determined that it was probable that the company would pay back only $654,000 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $1,090,000 loan.

1.Determine the amount of cash Conchita Martinez received from the loan on December 31, 2014. (Round present value factors to 5 decimal places, e.g. 0.52500 and final answer to 0 decimal places, e.g. 5,275.)

2. Prepare a note amortization schedule for Sauk City Bank up to December 31, 2016. (Round answers to 0 decimal places, e.g. 5,275.) Note Amortization Schedule (Before Impairment) Date Cash Received Interest Revenue Increase in Carrying Amount Carrying Amount of Note 12/31/14 $ 12/31/15 $ $ $ 12/31/16

3. Determine the loss on impairment that Sauk City Bank should recognize on December 31, 2016. (Round present value factors to 5 decimal places, e.g. 0.52500 and final answer to 0 decimal places, e.g. 5,275.) Loss due to impairment $

Explanation / Answer

1) Answer: $1,009,428

The cash that Conchita Martinez received is the PV of the cash flows associated with the note discounted at 11%

= 1090000*PVIF(11,5)+98100*PVIFA(11,5) = 1090000*0.59345 + 98100*3.69590 = 646860.5+362567.79

= 1009428.29 = $1,009,428

2) Amortization schedule is given below:

3) The loss on impairment that the bank should recognize as on 12/31/2016

=carrying amount - PV of revised cash flows = 1036725 - 711345 = $325,380

workings:

The PV of the cash flows as at 31.12.2016 = 654000*PVIF(11,3) + 98100*PVIFA(11,3)

645000*0.73119 + 98100*2.44371 = 471617.55 + 239727.95 = 711,345

12/31/2014 12/31/2015 31/12/2016 31/12/2017 31/12/2018 31/12/2019 Note Receivable (less discount) 1009428 1022365 1036725 1052665 1070358 Interest @ 11% 111037 112460 114040 115793 117742 interest received 98100 98100 98100 98100 98100 (9% on 1090000) Balance of note (less discount) 1022365 1036725 1052665 1070358 1090000 Discount on note receivable: opening balance 80572 67635 53275 37335 19642 closing balance 67635 53275 37335 19642 0 Carrying amount 1022365 1036725 1052665 1070358 1090000

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