Reference no: EM132795072
On December 31, 2018, Conchita Martinez Company signed a P1,000,000 non interest bearing note to Sauk City Bank. The market interest rate at that time is 12%. The stated interest rate on the note was 10%, payable annually. The note matures in 5 years. Considering these data, the bank released cash to the company amounting to P927,908; i.e., the total of the present value of the principal and interest. Unfortunately, because of lower sales, the company's financial situation worsened. On December 31, 2020, when the carrying amount of the loan is determined to be P951,968, Sauk City Bank determined that it was probable that the company would pay back only P600,000 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the P1,000,000 loan. The present value of 1 at 12% for 3 years is 0.71178 and the present value of an ordinary annuity of 1 at 12% for 3 years is 2.40183.
Problem 1: How much impairment loss should the bank recognize on December 31, 2020?
Problem 2: In the note amortization schedule before impairment, how much will appear as the carrying amount of the note as of December 31, 2019?
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