B is corrent. The requirement is to determine the amount of interest revenue to be recorded by Marsh, after a modification of terms type of troubled debt restructure on December 31, year 4. Under ASC Subtopic 310-40, when a modification of terms results in the present value of future cash flows being less than the carrying amount, then the interest revenue is calculated by using the effective interest method. In this problem the expected future cash flows is determined by discounting the principal and interest at the original effective rate of 12%.| 70,000 | x | .79719 | = | 55,803 | | 5,600 | x | 1.69005 | = | 9,464 | | Present value of future cash flows | | 65,267 |
The interest revenue to be recognized can then be determined using the effective interest method.| PV at 12/31/Y2 | | $65,267 | | Interest income at 12/31/Y3 ($65,267 x 12%) | $7,832 | | | Interest receivable at 12/31/Y3 (70,000 x 8%) | 5,600 | | | Increase in carrying value of loan | | 2,232 | | PV at 12/31/Y3 | | 67,499 | | Interest revenue at 12/31/Y4 (67,499 x 12%) | $8,100 | |
A is incorrect. The requirement is to determine the amount of interest revenue to be recorded by Marsh, after a modification of terms type of troubled debt restructure on December 31, year 4. Under ASC Subtopic 310-40, when a modification of terms results in the present value of future cash flows being less than the carrying amount, then the interest revenue is calculated by using the effective interest method. In this problem the expected future cash flows is determined by discounting the principal and interest at the original effective rate of 12%.| 70,000 | x | .79719 | = | 55,803 | | 5,600 | x | 1.69005 | = | 9,464 | | Present value of future cash flows | | 65,267 |
The interest revenue to be recognized can then be determined using the effective interest method.| PV at 12/31/Y2 | | $65,267 | | Interest income at 12/31/Y3 ($65,267 x 12%) | $7,832 | | | Interest receivable at 12/31/Y3 (70,000 x 8%) | 5,600 | | | Increase in carrying value of loan | | 2,232 | | PV at 12/31/Y3 | | 67,499 | | Interest revenue at 12/31/Y4 (67,499 x 12%) | $8,100 | |
c is incorrect. The requirement is to determine the amount of interest revenue to be recorded by Marsh, after a modification of terms type of troubled debt restructure on December 31, year 4. Under ASC Subtopic 310-40, when a modification of terms results in the present value of future cash flows being less than the carrying amount, then the interest revenue is calculated by using the effective interest method. In this problem the expected future cash flows is determined by discounting the principal and interest at the original effective rate of 12%.| 70,000 | x | .79719 | = | 55,803 | | 5,600 | x | 1.69005 | = | 9,464 | | Present value of future cash flows | | 65,267 |
The interest revenue to be recognized can then be determined using the effective interest method.| PV at 12/31/Y2 | | $65,267 | | Interest income at 12/31/Y3 ($65,267 x 12%) | $7,832 | | | Interest receivable at 12/31/Y3 (70,000 x 8%) | 5,600 | | | Increase in carrying value of loan | | 2,232 | | PV at 12/31/Y3 | | 67,499 | | Interest revenue at 12/31/Y4 (67,499 x 12%) | $8,100 | |
D is incorrect. The requirement is to determine the amount of interest revenue to be recorded by Marsh, after a modification of terms type of troubled debt restructure on December 31, year 4. Under ASC Subtopic 310-40, when a modification of terms results in the present value of future cash flows being less than the carrying amount, then the interest revenue is calculated by using the effective interest method. In this problem the expected future cash flows is determined by discounting the principal and interest at the original effective rate of 12%.| 70,000 | x | .79719 | = | 55,803 | | 5,600 | x | 1.69005 | = | 9,464 | | Present value of future cash flows | | 65,267 |
The interest revenue to be recognized can then be determined using the effective interest method.| PV at 12/31/Y2 | | $65,267 | | Interest income at 12/31/Y3 ($65,267 x 12%) | $7,832 | | | Interest receivable at 12/31/Y3 (70,000 x 8%) | 5,600 | | | Increase in carrying value of loan | | 2,232 | | PV at 12/31/Y3 | | 67,499 | | Interest revenue at 12/31/Y4 (67,499 x 12%) | $8,100 | |
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