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1
Q

Loan Impairment loss computation

Valuation allowance

A

PV of future payments:
old rate 5% new rate 4%

PV of principal (NP x PVOR)
Interest (NP x NR) x PVOR
= PV of future payments

Original principal 100,000
PV future payments 76,536
__________
Impairment loss 23,464

Less: condoned principal 10,000
condoned interest 10,000
__________
Valuation allowance 3,464

Set up amortization schedule:
76,536 x 5% 3,827
80,000 x 4% 3,200
Valuation amort 627

Journal Entries:

Bad debts 23,464
NR 10,000
Accrued interest 10,000
Valuation allowance

Valuation allowance 627
Cash 3,200
Interest Revenue 3,827