(Loan Impairment Entries) On January 1, 2007, Botosan Company issued a $1,200,000, 5-year, zero-interest-bearing note to National Organization Bank. The note was issued to yield 8% annual interest.

Unfortunately, during 2008, Botosan fell into financial trouble due to increased competition. After reviewing all available evidence on December 31, 2008, National Organization Bank decided that the loan was impaired. Botosan will probably pay back only $800,000 of the principal at maturity.

Instructions

(a) Prepare journal entries for both Botosan Company and National Organization Bank to record the issuance of the note on January 1, 2007. (Round to the nearest $10.)

(b) Assuming that both Botosan Company and National Organization Bank use the effective interest method to amortize the discount, prepare the amortization schedule for the note.

(c) Under what circumstances can National Organization Bank consider Botosan’s note to be

“impaired”?

(d) Compute the loss National Organization Bank will suffer from Botosan’s financial distress on December 31, 2008. What journal entries should be made to record this loss?