PROBLEM 1 (Impairment of Receivables)

Rainy Bank has a P 10,000,000 loan to Stormy Realty, which was invested by the latter in real estate development. Due to the economic downtrend in the real estate business, Stormy Realty is experiencing declining sales and is likely to default on its obligation to Rainy. Stormy requests for a restructuring of its loan with Rainy. Prevailing market rate of interest for similar obligations at the time of restructuring is 8%. Accrued interest receivable on the loan at December 31, 2016 is P 1,000,000 based on stated interest rate of 10%. Rainy had not previously recognized any impairment on this Stormy note.

Required: For each of the following alternative restructuring arrangements, determine the amount of impairment loss to be recognized by Rainy Bank.

1. Alternative 1

Reduction of principal to P 9,000,000.

Condonation of accrued interest.

Extension of maturity date to December 31, 2018.

Reduction of interest rate to 8%, payable annually on December 31.

2. Alternative 2

Payment of accrued interest on the date of restructuring.

Extension of maturity date of the loan to December 31, 2018, with extended term at

7% payable on December 31, 2017 and 2018.

3. Alternative 3

Condonation of accrued interest

Principal amount of P 2,000,000 plus interest on the unpaid principal reduced to 8%,

payable in annual installments to begin December 31, 2017.