Question

Impairment of zero-interest notes receivable, GAAP vs. IFRS

On December 31, 2020, Firth Company borrowed $62,092 from Paris Bank, signing a 5-year, $100,000 zero-interest note. The note was issued to yield 10% interest. Unfortunately, during 2022, Firth began to experience financial difficulty. As a result, at December 31, 2022, Paris Bank determined that it was probable that it would collect only $75,000 at maturity. The market rate of interest on loans of this nature is now 11%. 1,Instructions: On March 31, 2023, Paris learns that Firth will be able to repay the loan under the original terms.

Paris Bank uses IFRS. Prepare the journal entry to be recorded on March 31, 2023, if any.

Answer 1

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Step 1

Amortization Schedule (Before Impairment)

Date	Cash received	Interest (10%)	Discount Amortized	Carrying Value
31/12/20				$62,092
31/12/21	$0	$6,209	$6,209	$68,301
31/12/22	$0	$6,830	$6,830	$75,131

Step 2

Calculation of Impairment Loss:

31/12/22: Carrying Amount of Investment = $75,131

Less: Present Value of $ 75,000 =  $56,349 (rounded off)

3 years @ 10%

($75,000 x 0.7513148009) = $18,782  

Step 3

Journal Entry to record Note Impairment

Date	Particulars	Debit Amount	Credit Amount
31/12/22	Bad Debts Expenses A/c	$18,782
	To Allowance for doubtful account		$18,782
	(Being to record bad debt expenses)