Question

On January 1, 2011, Batonica Limited issued a $1.2-million, five-year, zero-interest-bearing note to Northern Savings Bank. The note was issued to yield 8% annual interest. Unfortunately, during 2011 Batonica fell into financial trouble due to increased competition. After reviewing all available evidence on December 31, 2011, Northern Savings Bank decided that the loan was impaired. Batonica will probably pay back only $800,000 of the principal at maturity.
Instructions
(a) Prepare journal entries for both Batonica and Northern Savings Bank to record the issuance of the note on January 1, 2011. (Round to the nearest $10.)
(b) Assuming that both Batonica and Northern Savings Bank use the effective interest method to amortize the discount, prepare the amortization schedule for the note.
(c) Under what circumstances can Northern Savings Bank consider Batonica’s note to be impaired?
(d) Estimate the loss that Northern Savings Bank will suffer from Batonica’s financial distress on December 31, 2011. What journal entries should be made to record this loss?


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  • CreatedAugust 23, 2015
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