Question
On January 3, 2020, FIN Company invested in a 7% bond with a principal amount of $600,000 issued by Z Company at a discount for
On January 3, 2020, FIN Company invested in a 7% bond with a principal amount of $600,000 issued by Z Company at a discount for $560,000 which would mature on December 31, 2024. The effective interest rate on the bond was 8.7%. In the worst case scenario of a default event, Z Company is not expected to be able to pay interest in 2022, 2023, and 2024 and the principal payment due on December 31, 2024. On January 3, 2020, the credit quality of Z Company was good and the probability of default during the first 12 months to December 31, 2020, was 1.2%. The probability remained stable throughout the period. Ignore discounting. Required: What stage of impairment loss would best describe the state of Z Company bonds during 2020? What is the loss allowance at December 31, 2020? (Enter your answer in millions (i.e., 10,000,000 should be entered as 10))
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