Notes Receivable - Impairment Flashcards
Choose the correct accounting by the creditor for a loan impairment. Column (1): recognize a loss or expense upon recognizing the impairment. Column (2): rate of interest to use in computing the revised book value of the receivable after the impairment.
1 2
A) Yes Original effective rate
B) Yes New implied effective rate
C) No Original effective rate
D) No New implied effective rate
A loan impairment is recorded by reducing the net book value of the receivable to the present value of probable future cash inflows, discounted at the original rate in the receivable. The original rate is used because the loan continues to exist. The loss to the firm is measured at the rate existing when the original loan was created. The difference between the book value and present value, at the date of recognizing the impairment, is recorded as an expense or loss. There is no reason to report overstated assets.
Answer = A
A creditor’s note receivable has a carrying value of $60,000 at the end of Year 1. Based on information about the debtor, the creditor believes the note is impaired and establishes the new carrying value of the note to be $25,000 at the end of Year 1. During Years 2 and 3, the debtor pays $14,000 on the note each year (total payments, $28,000). For Year 3, under which method of the two indicated is interest revenue recognized?
Interest Method Cost Recovery Method
A) Yes Yes
B) No No
C) Yes No
D) No Yes
The interest method recognizes interest revenue each year until the note is collected because the note was written down to present value when the impairment was recorded. The estimated future cash flows to be received include interest, which is recognized over the remaining term of the note. The cost recovery method recognizes interest revenue only after cash equal to the new carrying value is collected. During Year 3, total collections surpassed the $25,000 new carrying value. $3,000 of interest revenue is recognized under this method in Year 3 ($28,000 − $25,000).
Answer = A
Under IFRS, a cash generating unit (CGU) is:
A) The smallest business segment.
B) Any grouping of assets that generates cash flows.
C) Any group of assets that are reported separately to
management.
D) The smallest group of assets that generates
independent cash flows from continuing use.
A CGU is the smallest group of assets that can be identified that generates cash flows independently of the cash flows from other assets.
Answer = D
When a note receivable is determined to be impaired,
A) The note is written-off.
B) No recognition of the impairment is required until a
formal troubled-debt restructuring takes place.
C) The note is written down to the nominal sum of
future cash flows expected to be collected, including
interest.
D) A loss or expense is recognized as equal to the
difference between the note carrying value and the
present value of the cash flows expected to be
received.
A note is considered to be impaired if the present value of remaining cash flows is less than book value, using the rate in the note. This is caused by an expected delay in timing of cash flows or reduction in amount of cash flows compared with the original agreement. The creditor makes the determination that the note is impaired and writes the note down to present value. A loss is recorded for the decline in carrying value to present value.
Answer = D
