Grey Company holds an overdue note receivable of $800,000 plus recorded accrued interest of $64,000. The effective interest rate is 8%. As the result of a court-imposed settlement on December 31, 2006, Grey agreed to the following restructuring arrangement:

  • Reduced the principal obligation to $600,000.
  • Forgave the $64,000 accrued interest.
  • Extended the maturity date to December 31, 2008.
  • Annual interest of $40,000 is to be paid to Grey on December 31, 2007 and 2008.

The present value of the interest and principal payments to be received by Grey Company discounted for two years at 8% is $585,734. On December 31, 2006, Grey would recognize a valuation allowance for impaired loans of

  1. $ 14,266
  2. $184,000
  3. $278,266
  4. $0