Question

On December 31, 2020, Headland Company signed a $1,132,500 note to Sage 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, Headland's financial situation worsened. On December 31, 2022, Sage Bank determined that it was probable that the company would pay back only $679,500 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $1,132,500 loan. Determine the amount of cash Headland received from the loan on December 31, 2020. (Round present value factors to 5 decimal places, e.g. 0.52513 and final answer to 0 decimal places, e.g. 5,275.) Amount of cash Headland received from the loan $ e Textbook and Media Prepare a note amortization schedule for Sage Bank up to December 31, 2022. (Round answers to 0 decimal places, e.g. 5,275.) Note Amortization Schedule (Before Impairment) Date Cash Received Interest Revenue Received Date Increase in Carrying Amount here Carrying Amount Note 12/31/20 12/31/21 $ 12/31/22 e Textbook and Media Determine the loss on impairment that Sage Bank should recognize on December 31, 2022. (Round present value factors to 5 decimal places, e.g. 0.52500 and final answer to 0 decimal places, e.g. 5,275.) Loss due to impairment $

Answer 1

Amount of Cash Headland received from the Loan :-

Present value of principal + Present value of interest

Present value of principal = $1132500 * PVIF(10%,5 years)

                            = $1132500 * 0.62092 = $703192

Present value of interest = ($1132500 * 8%) * PVAF(10%,5 years)

                   = $90600 * 3.79079 = $343446

Cash Received = $703192 + $343446 = $1046638

Note amortization schedule :-

Note Amortization Schedule (Before Impairment)
Date	Cash Received 8%	Interest Revenue 10%	Increase in Carrying Amount	Carrying Amount of Note
12/31/20				$1046638
12/31/21	$90600	$104664	$14064	$1060702
12/31/22	$90600	$106070	$15470	$1076172

Loss due to Impairment :-

Carrying amount of loan (12/31/22) = $1076172

Less: Present value of $679500 due in3 years ($679500 * 0.75131) = $510515

Less: Present value of $90600 payable annually for 3 years ($90600 * 2.48685) = $225309

Loss due to impairment = ($1076172 - $510515 - $225309) = $340348