On December 31, 2014, Conchita Martinez Company signed a $1,290,000 note to Sauk

Question

On December 31, 2014, Conchita Martinez Company signed a $1,290,000 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, 2016, Sauk City Bank determined that it was probable that the company would pay back only $774,000 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $1,290,000 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

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.)

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

Explanation / Answer

1) Price of the Loan=10%*1290000*(1-(1+12%)^-5/12%)+(1290000/(1+12%)^5)

=.1*1290000*(1-(1+.12)^-5/.12)+(1290000/(1+.12)^5)

= 129000*(1-1.76234)/.12)+(1290000/1.76234)

=$1196997 Cash received

2)

  

3) Impairment Loss= $1228033-$774000=$454033 is recognized as loss

A B C D E F G Date Interest Payment Interest expenses at market rate*G Amortization of Note C-B Dr, balance in the a/c Loan Discount Credit balance in the Loan payable Carrying value of Note F-E Dec 31,2014 93003 1290000 1196997 Dec 31,2015 129000 143639.64 14639.64 78363.36 1290000 1211637 Dec 31,2016 129000 145396.3968 16396.3968 61966.96 1290000 1228033

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