On December 31, 2017, Cheyenne Company signed a $1,196,300 note to Ayayai Bank.
ID: 2568356 • Letter: O
Question
On December 31, 2017, Cheyenne Company signed a $1,196,300 note to Ayayai 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, Cheyenne’s financial situation worsened. On December 31, 2019, Ayayai Bank determined that it was probable that the company would pay back only $717,780 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $1,196,300 loan.
a. Determine the amount of cash Cheyenne received from the loan on December 31, 2017. (Round present value factors to 5 decimal places, e.g. 0.52513 and final answer to 0 decimal places, e.g. 5,275.)
b. Prepare a note amortization schedule for Ayayai Bank up to December 31, 2019. (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
12/31/19
c. Determine the loss on impairment that Ayayai Bank should recognize on December 31, 2019. (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
12/31/19
c. Determine the loss on impairment that Ayayai Bank should recognize on December 31, 2019. (Round present value factors to 5 decimal places, e.g. 0.52500 and final answer to 0 decimal places, e.g. 5,275.)
Explanation / Answer
a.)
Note:- Present value of Notes payable = Face value / (1+ market interest)number of payment + Interest [1-(1+market interest)-number of payments] / market interest
= $1,196,300/ (1+0.12)5 + (10% * $1,196,300)[1-(1+0.12)-5] / 0.12
= $1,196,300/ (1.12)5 + $119630[1-(1.12)-5] / 0.12
= $1,196,300/ (1.12)5 + $119630[1- 1/(1.12)5] / 0.12
= $1,196,300 / 1.76234 + $119630[1- 1/1.76234] / 0.12
= $678813.396 + $431238.837
= 1110052
b.) note amortization schedule
($1110052*12%)
=133206
[133206 -1,196,30]
= 13576
(1123628 * 12%)
=134835
[134835 - 1,196,30]
=15205
c.) loss on impairment = Carrying Amount of Note at 12/31/19 - Recoverable amount at maturity
= $1138833 - { [$717,780 * PVF (12%,3 years)] + [$1,196,30* PVAF(12%,3 years)] }
= 1138833 - { [$717,780 * 0.71178 ] + [$1,196,30 * 2.40183)}
= 1138833 - {510901 + 287331}
= 1138833 - 798232
= $340601
Date Accounts title Dr. Cr. December 31, 2017 Cash $1110052 Discount on Note Payable $86248 To Notes Payable $1,196,300Related Questions
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