040 Loan Impairment

Question 1

When does loan impairment occur?

Answer 1

When the creditor believes the loan payments actually to be received have a lower fair value than under the original agreement.

Question 2

What is the accounting treatment for loan impairments?

Answer 2

The receivable should be written down to: 1 Present value of future cash flows using original effective interest rate, or 2 Market value, if this value can be determined.

Question 3

How is the loss on impairment accomplished?

Answer 3

With a debit to bad debt expense and a credit to a contra-receivable account.

Question 4

List the methods through which interest revenue is recognized after a write-down has occurred.

Answer 4

Interest and cost recovery methods.

Question 5

When a receivable is impaired, what should it be written down to?

Answer 5

The PV of the future cash flows expected to be collected using original effective interest rate for the loan or market value if more determinable.