Question

Problem 7-16 Impairment of receivables

Problem 7-16 Impairment of receivables (Appendix 78] National Bank loaned the Lyon Company $10 million, at an Interest rate of 8%. The note was signed January 1, 2008, and was due December 31, 2022 Annual Interest was last pald on December 31, 2016. At January 1, 2018, National Bank concluded it was probable that the note was Impalred. National believes It will not collect accrued Interest, that it will only receive $500,000 of Interest each year, and that it will only receive $8 million of principal at the end of the life of the note. Assume National Bank believes there is only a 40% chance that the loan is Impalred (suffers a credit loss). (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1) (Use appropriate factor(s) from the tables provided.) Required: 1. Calculate the amount of Impairment that National Bank would recognize for the Lyon note under current U.S. GAAP. (Enter your answer in whole dollars. Round your final answer to nearest whole dollar.) Answer is complete but not entirely correct. Amount of impairment $3,358,979 2. Calculate the amount of credit loss that National Bank would recognize for the Lyon note, but assuming that since 2017 National has determined credit losses using the CECL model Introduced in ASU 2016-13. (Enter your answer in whole dollars. Round your final answer to nearest whole dollar.) Answer is complete but not entirely correct. Expected credit $ 9.458.408

Answer 1

1.

.Compute the amount of impairment that National Bank would recognize for the Lyon note under current U.S. GAAP:

Particulars		Amount
Previous value:
Accrued 2017 interest ($10,000,000 × 8%)	$800,000
Principal	$10,000,000
Amortized cost basis of the receivable		$10,800,000
New value:
Interest ($500,000 × 3.99271)	$1,996,355
Principal ($8,000,000 × 0.680583)	$5,444,664
		$7,441,019
Loss ($10,8000,000 - $7,441,019)		$3,358,981
PVAD(8%, 5) = 3.99271
PVD(8%, 5) = 0.680583

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2.

Compute the amount of credit loss that the National Bank would recognize for the Lyon note, assuming that since 2017 National has determined credit losses using the CECL model introduced in ASU 2016-13:

Particulars		Amount
Amortized cost basis of the receivable		$10,800,000
Expected credit loss:
(40% × $3,358,981)	$1,343,593
(60% × $0)	$0
		($1,343,593)
Revised amortized cost basis of the receivable		$9,456,407