The GW Co. is owed $1,000,000 by Mason, Inc. under an 8% note with three years remaining to maturity. The prior year of interest was unpaid. GW believes there is a 30% chance that Mason will fail to pay GW all amounts that GW is owed. In that 30% case, GW believes it will only receive amounts equal to a present value of $880,000.
- If GW is reporting under ASU 2016-13 and therefore using the CECL model, it would recognize an impairment loss of:

Question

Quizplus · Accepted Answer

If the impairment loss was certain, it would equal $200,000, equal to lost interest of $80,000 (calculated as $1 million × 8%) + reduced principal of $120,000 (calculated as $1 million - $880,000). With a 30% chance of loss, GW would calculate an expected loss of $60,000 (equal to 30% × $200,000).

The GW Co Is Owed $1,000,000 by Mason, Inc