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Marsh does not elect the fair value option for recording this note receivable. In accordance with the agreement, Saxe made payments to Marsh on December 31, year 3 and year 4. How much interest income should Marsh report for the year ended December 31, year 4?
A. $ 5,600
B. $ 8,100
C. $11,200
D. $0
Answer:B
B is corrent. The requirement is to determine the amount of interest revenue to be recorded by Marsh, after a modification of terms type of troubled debt restructure on December 31, year 4. Under ASC Subtopic 310-40, when a modification of terms results in the present value of future cash flows being less than the carrying amount, then the interest revenue is calculated by using the effective interest method.  In this problem the expected future cash flows is determined by discounting the principal and interest at the original effective rate of 12%.
70,000*0.79719=55,803
5,600*1.69005=9,464
Present value of future cash flows 65,267
The interest revenue to be recognized can then be determined using the effective interest method.
PV at 12/31/Y2 $65,267
Interest income at 12/31/Y3 ($65,267 x 12%)$7,832
Interest receivable at 12/31/Y3 (70,000 x 8%)5,600
Increase in carrying value of loan  2,232
PV at 12/31/Y3 67,499
Interest revenue at 12/31/Y4 (67,499 x 12%)$8,100