Accounting for the Impairment of a Loan
Galaxy Enterprises loaned $200,000 to Vader Inc. on January 1, 2007. The terms of the loan require principal payments of $40,000 each year for five years plus interest at the market rate of interest of 8%. The first principal and interest payment is due on January 1, 2008. Vader made the required payments during 2008 and 2009. However, during 2009 Vader began to experience financial difficulties, requiring Galaxy to reassess the collectability of the loan. On December 31, 2009, Galaxy determines that the remaining principal payments will be collected, but the collection of interest is unlikely.
1. Compute the present value of the expected future cash flows as of December 31, 2009.
2. Provide the journal entry to record the loan impairment as of December 31, 2009.
3. Provide the journal entries for 2010 to record the receipt of the principal payment on January 1 and the recognition of interest revenue as of December 31, assuming that Galaxy’s assessment of the collectability of the loan has not changed.