Reference no: EM133186609
Question - On December 31, 2019, Leni Company, a financing institution lent P10,000,000 to Digong Corp. due 3 years after. The loan is supported by an 10% note receivable. Based on the company's initial estimates the present value of the 12 months expected credit loss (ECL) discounted at 9% is at 600,000. The probability of default (PD) is at 8%.
Leni Company was able to collect interest as it became due at the end of 2020. There was no evidence of significant increase in credit risk by the end 2020 and that the receivable is determined to have "low credit risk". There were no changes in its initial estimate of the 12 months expected credit loss either.
By the end of 2021, Leni Company was able to collect interest as it became due. Based on available forward-looking information (determinable without undue cost or effort), however, there is an evidence that there was a significant increase in credit risk by the end of 2021. Leni Company therefore had to change its basis of calculation of the loss allowance from 12 months ECL to lifetime expected credit loss. The present value of the lifetime expected credit loss discounted at 9% is at 3,000,000. The probability of default (PD) is at 25%.
During 2022, however, due to Digong Corp.'s business deterioration and significant financial difficulties, the company was not able to collect amounts due at the end 2022. After reviewing all available evidence at December 31, 2022, Leni Company determined that the receivable is credit-impaired and that impairment loss should be recognized. Leni Company also entered into the following concessions with Digong Corp.
1. Interest due in 2022 is waived.
2. Only 8M of the principal shall be collected in 2 equal installments, at the end of 2023 and 2024.
3. Annual interest on the 8M revised principal shall be collected at 12% at the end of each year for the next two years (based on outstanding balance).
As of December 31, 2022, the prevailing rate of interest for all debt instruments is 14%.
Based on the above information and on your audit, what is the additional bad debt/impairment loss on the receivables to be recognized in 2021?
A. 800,000
B. 692,271
C. 758,125
D. 750,000