NYY corp., a calendar year firm, sold equipment to Red Sox nation Inc. on Jan 1,
ID: 2455030 • Letter: N
Question
NYY corp., a calendar year firm, sold equipment to Red Sox nation Inc. on Jan 1, 2010 and received in return a note, due on Dec 31, 2013, with a face value of $1,000,000, and bearing interest at a standard rate of 3% per year. This rate was deemed to be unrealistically low given the economic climate in early 2010 and he credit worthiness of red Sox nation Inc.
NYY accounted for the note on 1/1/10 by imputing an effective interest rate of 12% per year and recognizes interest revenue each period based on application of the effective interest method. The 3% cash interest payments were to be remitted each Dec 31, beginning on Dec 31, 2010. Those payments were made by Red Sox nation Inc. on Dec 31, 2010 and 2011.
On Dec 31, 2012, NYY identified this note as impared and offered to restructure the debt as follows in an attempt to minimize their loss on this note receivable. Specifically, NYY offered (and Red Sox nation Inc accepted) these changes.
- Forginess of accrued cash interest owed by Red Sox nation Inc (due on 12/31/12)
- Reduction of principal due date until Dec 31, 2015
- Cash interest will begin to accrue at 3% on newly revised principal balance beginning immediately and is due annually (with next interest payment due on 12/31/13)
Questions:
1/ Prepare an original amortization schedule for this loan as of Jan 1, 2010 for NYY. This schedule should identify the expected cash receipts, annula interest revenue to ve recognized, the remaining balance of the note discount, and the carrying value of the note at the end of each year up to and including the original maturity date.
2/ What must be true in order for NYY to have identified this loan as impared on 12/31/12 (i.e. what us the impairment test for notes receivable?)
3/ What us the definition of a troubled debt restructuring?
4/ Compute the loss that must be recognized by NYY on its 2012 income statement as a result of this impairment/troubled debt restructuring. Provide explainations as appropriate to justify and decisions made in arrivingat the loss amount (i.e. what amounts are compared to calculate the loss?)
5/ Prepare a second amortization schedule for this loan as of Dec 31, 2012 (after the impairment/troubled debt restructuring). This schedule should identify the expected cash recipts, annual interest revenue to be recognized, the remaining balance of the note discount, and the carrying value of the nore at the end of each year up to and including the revised maturity date.
I think the schedule is something like this
Cash Recived Interest Revenue Discount Amortized Carrying Value 100000 12% 1/1/10 63552 12/31/10 3000 7626.24 4626.24 68178.24 12/31/11 3000 8181.39 5181.39 73359.63 12/31/12 3000 8803.16 5803.16 79162.78 12/31/13 3000 9499.53 6499.53 85662.32Explanation / Answer
Cash Received
Interest Revenue
Discount
Carrying Value
640000
2010
30000
76800
468000
716800
2011
30000
86016
56016
802816
2012
30000
86337.92
56337.92
889153.92
2013
30000
106698.47
76698.47
995852.
A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. When evaluating a note for impairment, the factors considered include: (a) indications that the borrower is experiencing business problems such as late payments, operating losses, marginal working capital, inadequate cash flow or business interruptions, (b) loans secured by collateral that is not readily marketable, or (c) loans that are susceptible to deterioration in realizable value. The Company records interest income on its impaired notes receivable on an accrual basis, when collection is assured, based on the present value of the estimated cash flows of identified impaired notes receivable.
Definition: A troubled debt restructuring occurs when a creditor for economic or legal reasons related to its debtor's financial difficulties grants a concession to the debtor that it would not normally consider. A debtor is experiencing financial difficulties when one of the following conditions is present:
A concession may involve restructuring the terms of a debt (such as a reduction in the interest rate or principal due, or an extension of the maturity date) or payment in some form other than cash, such as an equity interest in the debtor.
A debtor that can obtain funds from sources other than the lender at market interest rates is generally not involved in a troubled debt restructuring.
Cash Received
Interest Revenue
Discount
Carrying Value
640000
2010
30000
76800
468000
716800
2011
30000
86016
56016
802816
2012
30000
86337.92
56337.92
889153.92
2013
30000
106698.47
76698.47
995852.
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