+1 862 207 3288 On January 1, 2007, Cermack National Bank loaned $5,000,000 under a two-year, zero coupon note to a real estate developer. The bank recognized interest revenue on this note of approximately $400,000 per year. Due to an economic downturn, the developer was unable to pay the $5,800,000 maturity amount on December 31, 2008. The bank convinced the developer to pay $800,000 on December 31, 2008, and agreed to extend $5,000,000 credit to the developer despite the gloomy economic outlook for the next several years. Thus, on December 31, 2008, the bank issued a new two-year, zero coupon note to the developer to mature on December 31, 2010 for $6,000,000. The bank recognized interest revenue on this note of approximately $500,000 per year. The bank’s external auditor insisted that the riskiness of the new loan be recognized by increasing the allowance for uncollectible notes by $1,500,000 on December 31, 2008, and $2,000,000 on December 31, 2009. On December 31, 2010, the bank received $1,200,000 from the developer and learned that the developer is in bankruptcy and that no additional amounts would be recovered.
