On December 31, 2025, Waterway Company signed a $1,228,500 note to Wildhorse Bank. The market rate at that time was 10%. The stated interest rate on the note was 8% payable annually. Unfortunately, because of lower sales, Conchita Martinez’s financial situation worsened. On December 31, 2027, Wildhorse Bank determined that it was probable that the company would pay back only $737,100 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $1,228,500 loan.

On December 31, 2025, Waterway Company signed a $1,228,500 note to Wildhorse Bank. The market rate at that time was 10%. The stated interest rate on the note was 8% payable annually. Unfortunately, because of lower sales, Conchita Martinez’s financial situation worsened. On December 31, 2027, Wildhorse Bank determined that it was probable that the company would pay back only $737,100 of the principal at maturity. However, it was considered likely that interest would continue to be paid, based on the $1,228,500 loan.

 

Determine the amount of cash Waterway received from the loan on December 31, 2025.

 

Working:

     Present value of principal for Year 5 @ 10% ($1,228,500  x .6209)   .......................         762,776
    Present value of interest for 5 Years ($1228500 x 8%) =$98,280  x 3.79079) ...............     372,559
    Cash received          .............................................................................................  .............$1,135,360

 In Excel:

 Helpful Formula:

PV = FV / (1 + i)^n

Present value of an annuity = Factor x Amount of the annuity

Prepare a note amortization schedule for Wildhorse Bank up to December 31, 2027.

 

 

Working:

Cash Received: ($1228500 x 8%) =$98,280

 Interest Revenue in 12/31/26 = 1135360 x 10% = 113536

Increase in carry Amount in 12/31/26 = 113536 - 98280 = 15,256

Carrying Amount of Note in 12/31/26 = 1135360 + 15256 = 1150616

Interest Revenue in 12/31/27 = 1150616 x 10% = 115062

Increase in carry Amount in 12/31/27 = 115062 - 98280 = 16,782

Carrying Amount of Note in 12/31/27 = 1150616 + 16,782 = 1167398

 

 Determine the loss on impairment that Wildhorse Bank should recognize on December 31, 2027.

 

Working: 

Loss due to impairment:

        Carrying amount of loan (12/31/27) .................................................     ......      $1167398
        Less:  Present value of $737100 due in
        3 years @ 10%, ($737100 X .7513)  .....................................   ....   553,794  
        Present value of ($1228500 x 8%) $98,280 payable annually
        for 3 years @10%  ($98,280 X 2.48685)................................        244,408 ....  (798,202)
        Loss due to impairment     .........................................................................       $369,196

In Excel: