Today is January 1, 2020, and Realistic Retailer as just "co-signed" a loan taken out by one of Realistic's primary suppliers. Realistic agreed to "co-sign" in order to assure that the supplier remained in business for at least another year. According to the terms of the loan, the supplier will owe the lender $ 2,240,000 on December 31, 2020 (specifically, the supplier borrowed $ 2,000,000 at an interest rate of 12% per year, which is a reasonable rate given the riskiness of the supplier). Realistic estimates that there is a 30% likelihood that the supplier will default on the loan, in which case Realistic will have to make the full payment of $ 2,240,000. If the supplier does not default, Realistic will not have to make a payment on December 31, 2020, and will be relieved of any future obligations.

Realistic Retail prepares financial statements in accordance with US GAAP. Based on the information provided above, what is the amount of liability, if any, that Realistic should record at the inception of the loan?

• $ 0

• $ 600,000

• $ 672,000

• $ 2,000,000

• $ 2,240,000

• None of the above.

Answer rating: 100% (QA)

Answer is as follow Answer Answer is Option 3 672000 ... View the full answer