On December 31, 2014, Conchita Martinez Company signed a $1,070,000 note to Sauk

Question

On December 31, 2014, Conchita Martinez Company signed a $1,070,000 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 $642,000 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $1,070,000 loan.

1) Determine the amount of cash Conchita Martinez received from the loan on December 31, 2014.

2Loss due to impairment

Explanation / Answer

2)

Ans A Price of the bond = c × F × (1 (1 + r)-t)/r+F(1 + r)t C=Interest Rate F= Face Value r=Market Interest Rate Price of Bond= Present value of Interest payments+Present value of the bond Price of Bond 96300*(1-(1.11)^-5)/.11)+1070000/(1.11)^5 96300*(1-.5935)/.11)+1070000*.5935 Cash received 990917.3 Discount 79082.7 Total 1070000

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