Peter,proprietor of Peter's Easy Loan Company,loaned Jessie $4,000 on December 1,2011.The loan is to be repaid on December 1,2012,along with $600 interest.On July 10,2012,Peter learns that Jessie has filed for personal bankruptcy and that non-secured creditors will receive only $0.60 on the dollar.Peter actually receives nothing until February 24,2013.On that date,Peter receives a check for $1,000 from Jessie's bankruptcy proceedings in final settlement of the loan.How should Peter account for the loan to Jessie?

Question

Quizplus · Accepted Answer

Peter should account for the loan as an ordinary loss in the year that he learns about Jessie's bankruptcy, which is 2012. The amount of the loss is the outstanding balance of the loan minus the amount expected to be received from the bankruptcy proceedings. The outstanding balance of the loan is $4,000, and the expected recovery is $4,000 x 0.60 = $2,400. Therefore, the loss is $4,000 - $2,400 = $1,600.

When Peter receives the $1,000 check in 2013, he should account for it as an ordinary recovery of a previously recognized loss. The amount of the recovery is $1,000, so the remaining loss is $1,600 - $1,000 = $600, which should be recognized in 2013.

Therefore, the total loss recognized for this transaction is $1,600 in 2012 and $600 in 2013, both as ordinary losses.