Question

On December 31, 2020, Flounder Company signed a $1,278,400 note to Culver Bank. The market interest rate at that time was 10%. The stated interest rate on the note was 8%, payable annually. The note matures in 5 years. Unfortunately, because of lower sales, Flounder’s financial situation worsened. On December 31, 2022, Culver Bank determined that it was probable that the company would pay back only $767,040 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $1,278,400 loan.
Required:
a. Determine the amount of cash Flounder received from the loan on December 31, 2020.
b. Prepare a note amortization schedule for Culver Bank up to December 31, 2022.
c. Determine the loss on impairment that Culver Bank should recognize on December 31, 2022.

Answer 1

Answer:

All requirements are solved

Explanation:

An amortization schedule is a complete table of periodic loan payments, showing the amount of principal and the amount of interest that comprise each payment until the loan is paid off at the end of its term. Each periodic payment is the same amount in total for each period.

Requirement A

Amount of cash Flounder received from the loan =(1,278,400 x 0.62092) (102,272 x 3.79079)

Amount of cash Flounder received from the loan = 1,181,476    

   

Requirement B

Date           Cash           Interest         Increase in                 Carrying Amount

               Received Revenue     Carrying Amount         of Note

12/31/20                                                                                      1,181,476

12/31/21    102,272         118,148         15,876                       1,197,352

12/31/22   102,272         119,735         17,463                       1,214,815

Requirement C

Loss due to impairment = 1,214,815 - [(767,040 x 0.75131) (102,272 x 2.48685)]          

Loss due to impairment = 384,195