Final answer:
The loss on impairment Vaughn Bank should recognize is calculated based on the decline in the value of the loans due to defaults. If the loans' value fell from $5 million to $3 million, the impairment loss would be $2 million.
Step-by-step explanation:
To determine the loss on impairment that Vaughn Bank should recognize, we need to establish the decline in the carrying amount of its loans due to unexpected defaults. Specifically, assuming a scenario similar to the Safe and Secure Bank provided in our references, if the original value of loans was $5 million and this value declined to $3 million due to a wave of defaults, then the impairment loss would be the difference between the two.
Here is the calculation:
- Original value of loans: $5 million
- Value after defaults: $3 million
- Impairment loss: $5 million - $3 million = $2 million
The impairment loss of $2 million represents the loss in value of the loans on the bank's balance sheet. This loss should be recognized in the financial statements as it reflects a reduction in asset value due to increased credit risk and defaults.