[Anonymous]

Hello I was wondering if anyone can help in solving the problem that I have been struggling with for several times.

“On Jan 1, Y1, A loans to B $200,000 with 10% simple interest note payable in ten years. Interest on the note is payable annually and the principal is due at the end of the term. On January 1, Y3, B has yet to pay any interest and approaches A to renegotiate the terms. A agrees and forgives the interest on the note accrued to date and reduces the interest to 8%.

Present value of $1, 10%, 8 years 0.467

Present value of an Annuity, 10%, 10 year 5.335

As a result, B records

a. Extraordinary loss $56,100

b. Valuation allowance $61,240

c. Bad debt expense $64,480

d. Extraordinary loss $39,900

Answer: B

My question is why is accrued interest receivable 40,000 in the journal entry?

JE:

DR: Note receivable $240,000

DR: Bad debt expense 61,240

CR: Note receivable $200,000

CR: Accrued interest receivable 40,000

CR: Valuation allowance 61,240

I thank you for your help.

[stoleway]

Accrued interest is $40,000 becuase the borrower did not pay 2 yrs of interest on this loan.

Hope this makes sense?

REG -63│ 84!!
BEC- 59│70│ 71 │78!
AUD- 75!
FAR- 87!

Mass-CPA

[Anonymous]

Thank you. (I thought you would have to do 200,000 * 10% /10 years.)

[Author]

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