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Problem - On December 31, 2020, Chou Bank has a loan receivable of P2,000,000 from a borrower that it is carrying at face value and is due on December 31, 2025. Interest on the loan is payable at 9% each December 31. The borrower paid the interest due on December 31, 2020 but informed the bank that it would probably miss the next two years' interest payments because of financial difficulty. After that, the borrower is expected to resume the annual interest payment but it would make the principal payment one year late, with interest paid for that additional year at the time of principal payment. The present value of 1 at 9% is as follows:
One period
0.917
Two periods
0.842
Three periods
0.772
Four periods
0.708
Five periods
0.650
Six periods
0.596
Required -
1. Compute the present value of the loan receivable on December 31, 2020.
2. Compute the impairment loss to be recognized on December 31, 2020.
3. Compute for the interest income in 2021.
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