NYY corp., a calendar year firm, sold equipment to Red Sox nation Inc. on Jan 1,
ID: 2717878 • Letter: N
Question
NYY corp., a calendar year firm, sold equipment to Red Sox nation Inc. on Jan 1, 2010 and received in return a note, due on Dec 31, 2013, with a face value of $1,000,000, and bearing interest at a standard rate of 3% per year. This rate was deemed to be unrealistically low given the economic climate in early 2010 and he credit worthiness of red Sox nation Inc.
NYY accounted for the note on 1/1/10 by imputing an effective interest rate of 12% per year and recognizes interest revenue each period based on application of the effective interest method. The 3% cash interest payments were to be remitted each Dec 31, beginning on Dec 31, 2010. Those payments were made by Red Sox nation Inc. on Dec 31, 2010 and 2011.
On Dec 31, 2012, NYY identified this note as impared and offered to restructure the debt as follows in an attempt to minimize their loss on this note receivable. Specifically, NYY offered (and Red Sox nation Inc accepted) these changes.
- Forginess of accrued cash interest owed by Red Sox nation Inc (due on 12/31/12)
- Reduction of principal due date until Dec 31, 2015
- Cash interest will begin to accrue at 3% on newly revised principal balance beginning immediately and is due annually (with next interest payment due on 12/31/13)
Questions:
1/ Prepare an original amortization schedule for this loan as of Jan 1, 2010 for NYY. This schedule should identify the expected cash receipts, annula interest revenue to ve recognized, the remaining balance of the note discount, and the carrying value of the note at the end of each year up to and including the original maturity date.
2/ What must be true in order for NYY to have identified this loan as impared on 12/31/12 (i.e. what us the impairment test for notes receivable?)
3/ What us the definition of a troubled debt restructuring?
4/ Compute the loss that must be recognized by NYY on its 2012 income statement as a result of this impairment/troubled debt restructuring. Provide explainations as appropriate to justify and decisions made in arrivingat the loss amount (i.e. what amounts are compared to calculate the loss?)
5/ Prepare a second amortization schedule for this loan as of Dec 31, 2012 (after the impairment/troubled debt restructuring). This schedule should identify the expected cash recipts, annual interest revenue to be recognized, the remaining balance of the note discount, and the carrying value of the nore at the end of each year up to and including the revised maturity date.
Explanation / Answer
2. A loan is impaired when
--> the recorded investment in the impaired loan
--> is less than
--> the present value of expected future cash flows
(discounted at the loan's effective interest rate)
3. Definition of troubled debt restructuring
Process by which an institutional lender (such as a bank) modifies or relaxes the terms of a loan agreement to minimize the eventual loss by accommodating a borrower who is financially incapable of meeting them. According to the US Financial Accounting Standards Board standard 15 (FASB 15) restructuring of troubled loans (where no payment has been made for 90 days or more) is classified as either a loan where (1) the borrower is required to pledgeadditional assets as collateral, or (2) the terms of the loan agreement are modified to include, among other changes, (a) provision for outright foreclosure on the loan without applying to the courts, (b) reduction in the applicable interest-rate, (c) extension of the loan period, (d) acceptance of interest-only payments for a specified period, and/or (e) forgiveness of a part of the principal and/or accrued interest amount.
4. Loss to be recognized = carrying value of investment less present value of loan
$623194 - $556423 = $66771
5.Revised amortization schedule - term 4 years and same interest rate of 12%
Opening balance will be the same as it prevailed in original schedule on 31.12.2012 -date of restructuring
Original Amortization Schedule Date Opening Balance Interest Principal Repaid Closing Balance 01-Jan-10 $1,000,000 $120,000 ($329,234) $790,766 01-Jan-11 $790,766 $94,892 ($329,234) $556,423 01-Jan-12 $556,423 $66,771 ($329,234) $293,959 01-Jan-13 $293,959 $35,275 ($329,234) ($0)Related Questions
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