.Debtor Bank on a 10-year, 15% note in the amount of US $100, 000, plus US $30, 000 accrued interest_ Because·-if financial difficulty. Debtor has been unable to make annual interest payments for the past 2 years. and the n-ate is due today. Accordingly. Bank legally agreed to restructure Debtor's debt as follows:· The US $30.000 of accrued interest was forgiven. · Debtor was given 3 more years to pay off the debt at 8% interest. Payments are to be made annually at year-end. The present value of the payments using the prevailing rate for similar instruments of an issuer with a similar credit rating is US $84.018. At the date of the restructuring. Debtor properly records
Answer(s): C
Derecognition of a financial liabilityor a part) occurs only by means of extinguishment. This condition is satisfied only when the debtor pays the creditor or is legally released from primary responsibility either by the creditor or through the legal process. An extinguishment and derecognition of the old debt and recognition of new debt occurs when the borrower and lender exchange debt instruments with substantially different terms, that is, when the respective discounted cash flows differ by at least 10%. A substantial modification of terms is also accounted for as an extinguishment. The difference between the carrying amountincluding unamortized costs) of a liabilityor part) that has been extinguished or transferred and the amount paid is included in profit or loss. This transaction qualifies as an extinguishment based on a substantial modification of terms because the discounted cash flow from the old debtUS $130.000 due immediately) and the new debtgiven as US $84.018) differ by at least 10%. Hence, the amount included by Debtor in profit or loss at the date of the restructuring is a US $45, 982 gain$130.000 - $84.018). that is. the difference between the carrying amount extinguished and the amount paidthe present value of the new debt instrument determined by discounting the cash outflows at the prevailing rate for similar instruments of an issuer with a similar credit rating). The entry is to debit the extinguished liability for accrued interest and principalUS $130.000), debit discount on note payableUS $15, 982), credit note payableUS $100.000). and credit gainUS $45, 982).
In November of the current year, the vice-president of a local bank reviews the bank's mortgage portfolio prior to the December 31 year-end. The bank's largest client has mortgages on buildings in three cities. The client has incurred net losses for the past 3 years and is now experiencing serious cash flow problems. For the past 6 months, no payments have been made on any of the three mortgages. The vice-president reluctantly concludes that it is probable that the full amount of principal and interest will not be collected. What is the impact of this conclusion on the local bank's current year financial statements?
Answer(s): D
A financial asset, such as a lender's mortgage receivable, is impaired if its carrying amount at the balance sheet date exceeds its estimated recoverable amount If it is probable that all amounts due on such a held-to-maturity investmenta financial asset carried at amortized cost) cannot be collected, the loss should be included in profit or loss_ The loss equals the difference between the carrying amount and the present value of the expected future cash flows discounted at the original effective interest rate. The carrying amount of the asset should be reduced to its estimated recoverable amount directly or by crediting an allowance account
An entity often factors its accounts receivable. The finance company requires an 8% reserve and charges a 1.5% commission on the amount of the receivable. The remaining amount to be advanced is further reduced by an annual interest charge of 16%. What proceedsrounded to the nearest dollar) will the entity receive from the finance company at the time a US $110, 000 account that is due in 60 days is turned over to the finance company?
The factor will hold out US $8, 800$110, 000 x 8%) as a reserve against returns and allowances and US $1, 650$110, 000 1.5%) as a commission. That leaves US 300, 50111 to be advanced to the seller. However, interest at the rate of 16% annually is also to be withheld. For 60 days that interest would amount to approximately US $2, 655assuming a 360-day year). The proceeds to be given to the seller equal US $96, 895$99, 550 - $2, 655).
Subsequent measurement of trade receivables is at
According to IAS 39, subsequent measurement of financial assetsincluding derivatives that are assets) is at fair value with certain exceptions. Loans and receivables and held-to- maturity investments are measured at amortized cost using the effective interest method. Unquoted equity instruments whose fair value is not reliably measurable are reported at cost.
A plot of land is acquired in exchange for US $250, 000 cash and a noninterest-bearing note with a face amount of US $1, 000.000 on January 1 of the current year. The US $1, 000, 000 is payable in installments of US $250, 000 each, with the first installment due December 31 of the current year. With regard to imputing interest on this note.1) what market rate should be used to account for interest for the current year and2) what should be done in future years when there is a change in prevailing interest rates?
Answer(s): A
Determination of the imputed interest rate is made at the time the debt instrument is issued. Subsequent to initial recognition, most financial liabilities are measured at amortized cost using the effective interest method. Exceptions are those1) classified as at fair value through profit or loss or2) arising when a transfer of a financial asset does not qualify for derecognition or is accounted for on a continuing involvement basisIAS 39). Consequently, a change in the prevailing market rate does not affect the measurement of the noninterest-bearing note given for the land.
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