Loan Impairment: Initial Measurement
On January 1 of Year 1, the lending company made a $10,000, 8% loan. The $800 interest is receivable at the end of each year, with the principal amount to be received at the end of five years. As of the end of Year 1, the first year’s interest of $800 has not yet been received because the borrower is experiencing financial difficulties. The lending company negotiated a restructuring of the loan. The payment of all of the interest ($4,000 = $800 x 5 years) will be delayed until the end of the 5 year loan term. In addition, the amount of principal repayment will be Dr. opped from $10,000 to $5,000. Make the journal entry necessary on the lending company’s books to record this loan impairment on December 31 of Year 1.