Question

On December 31, 2019, Bang Corporation borrowed $200,000 from SuperFlash Company and gives SuperFlash a $200,000, five-year, non-interest bearing note with a face value of $200,000. The conditions of the note provide that SuperFlash can rent a warehouse from Bang Corporation at less than regular market price over the next five years. Bang normally has to pay an interest rate of 10% when it borrows money.

Instructions:

a) Prepare Bang’s journal entry to record the receipt of cash, the note and any other obligation resulting from this contract assuming the company follows IFRS.

Unfortunately, during 2020 Bang began to experience some financial difficultly. As a result, there was determined to be a significant increase in risk and at December 31, 2020, SuperFlash estimated that it was expected that it would receive only $150,000 at maturity. (For simplicity, assume that this is the probability-weighted value.) The market rate of interest on loans of this nature is now 11%. Assume the obligation to provide the rental space at a less than regular market price is not impaired.

Instructions:

b) Using your financial calculator or excel functions, prepare the entry (if any) to record the impairment of the loan on December 31, 2020 by SuperFlash Company

. c) Prepare the entry (if any) to record the existence of financial difficulty on December 31, 2020 by Bang Corporation. Show your calculations/calculator inputs.

Answer 1

Question-A

Bang’s journal entry:

Bank Account ==> $200,000(Debit)

From super flash company ==> $200,000(Credit)

(borrowed money from superflash company ==> $200,000@10%)

Interest on loan ==> $20,000(Debit)

Bank ==> $20,000(Credit)

Interest on loan ==> $22,000(Debit)

Interest on loan Payable ==> $20,000(Credit)

Question-B

SuperFlash Company - The entry to record the impairment of the loan on Dec 31, 2020

Bearing note ==> $150,000(Debit)

Add:Loss on bearing note ==> $50,000(Debit)

Bearing Bond ==> $200,000(Credit)

Question-C

Bang Corporation-Entry to record the existence of financial difficulty on Dec31, 2020

Bearing bond-(loan) ==> $200000(Debit)

Loss on bearing bond ==> $50000(Credit)

Bank ==> $150000(Credit)