On January 3, 2020, FIN Company invested in a 7% bond with a principal amount of $600,000 issued by Z Company at a discount for $560,000 which would mature on December 31, 2024. The effective interest rate on the bond was 8.7%. In the worst case scenario of a default event, Z Company is not expected to be able to pay interest in 2022, 2023, and 2024 and the principal payment due on December 31, 2024. On January 3, 2020, the credit quality of Z Company was good and the probability of default during the first 12 months to December 31, 2020, was 1.2%. The probability remained stable throughout the period. Ignore discounting. On January 3, 2023, Z Co announced that it will be able to pay only 15% of interest payments. FIN Co assessed that the probability of default on interest and principal payments is 85%. Apply discounting at the effective interest rate.

Required

What stage of impairment loss would best describe the state of Z Company bonds at this point? What is the loss allowance at January 3, 2023? What is the amortized cost balance at this date? What is the interest revenue to be reported for 2023?

Answer rating: 100% (QA)

Solution Amortized Carrying Value as on 03012023 Date Opening Interest Payment ... View the full answer