On January 1, 2017, 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 2017 Batonica fell into financial trouble due to increased competition. After reviewing all available evidence on December 31, 2017, Northern Savings Bank decided that the loan was impaired and that there was a significant change in credit risk. Batonica will probably pay back only $800,000 of the principal at maturity. For simplicity, assume that this reflects the probability weighted amount. Both Batonica and Northern Savings Bank prepare financial statements in accordance with IFRS 9.
Instructions
(a) Using time value of money tables, a financial calculator, and computer spreadsheet functions, prepare journal entries for both Batonica and Northern Savings Bank to record the issuance of the note on January 1, 2017. (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) How would Northern Savings Bank determine the impairment loss for Batonica's note?
(d) Using time value of money tables, a financial calculator, and computer spreadsheet functions, estimate the loss that Northern Savings Bank will suffer from Batonica's financial distress on December 31, 2017?