Answer:
Journal Entries
December 31, 2020
Dr. Note Receivables $114,000
Cr. Discount on bond $46,347
Cr. Cash $67,653
December 31, 2020
Dr. Impairment loss $20,839
Cr. Allowance for Impairment $20,839
Explanation:
Calculate the discount on the bond as follow
Discount on the bond = Face value of Note - Borrowed Amount = $114,000 - $67,653 = $46,347
On December 31, 2020 calculate the present value of face value of note and recoverable value
Present value of Note = Face value x Discount factor at 11% for 3 years = $114,000 x 1/( 1 + 11%)^3 = $83,355.82
Present value of recoverable value of note = Recoverable value of note x Discount factor at 11% for 3 years = $85,500 x 1/( 1 + 11%)^3 = $62,516.86
Now calculate the impairment loss as follow
Impairment loss = Present value of Note - Present value of recoverable value of note = $83,355.82 - $62,516.86 = $20,838.96 = $20,839
