Problem:

On December 31, 2014, Firth Company borrowed $62,092 from Paris Bank, signing a 5-year, $100,000 zero-interest-rate note. The note was issued to yield 10% interest. Unfortunately, during 2016, Firth began to experience financial difficulty. As a result, at December 31, 2016, Paris Bank determined that it was probable that it would collect only $75,000 at maturity. The market rate of interest on loans of this nature is now 11%.

Required:

Question 1: Prepare the entry (if any) to record the impairment of the loan on December 31, 2016, by Paris Bank.

Question 2: Prepare the entry on March 31, 2017, if Paris learns that Firth will be able to repay the loan under the original terms.

Note: Be sure to show how you arrived at your answer.