Question

On December 31, 2017, Firth Company borrowed \(62,092 from Paris Bank, signing a 5-year, \)100,000 zero-interest-rate note. The note was issued to yield 10% interest. Unfortunately, during 2019, Firth began to experience financial difficulty. As a result, at December 31, 2019, Paris Bank determined that it was probable that it would collect only $75,000 at maturity. The market rate of interest on loans of this nature is now 11%.

Instructions

(a) Prepare the entry (if any) to record the impairment of the loan on December 31, 2019, by Paris Bank.

(b) Prepare the entry on March 31, 2020, if Paris learns that Firth will be able to repay the loan under the original terms.

Short answer

The business entity will incur an impairment loss of$18,783.

Step-by-step solution

Definition of Loan

A loan can be defined as the money lent by any financial institution or individual to another business or individual. Such money is reported as a liability by the individual or firm taking it.

Journal Entry for Impairment of Loan

Date	Accounts and Explanation	Debit $	Credit $
31 Dec 2019	Bad Debt expenses	$18,783
	Allowance for doubtful account		$18,783

Working note:

Note amortization schedule

Date	Cash Received	Interest revenue @ 10%	Increase in carrying amount	Carrying amount of note
31 Dec 2017	0	0	0	$62,092
31 Dec 2018	0	$6,209	$6,209	$68,301
31 Dec 2019	0	$6,830	$6,830	$75,131

Computation of Impairment loss:

Particular	Amount $
Carrying amount	$75,131
Less: Present value of $75,000 @10% for 3 years (PVF: 0.7513)	($56,348)
Impairment loss	$18,783

Recovery of Loan

Date	Accounts and Explanation	Debit $	Credit $
31 March 2020	Allowance for doubtful account	$18,783
	Bad Debt expenses		$18,783