Modification of terms:

Carrying amount of liability (P2,000,000 x 1/4) P500,000

Less present value of restructured debt:

Present (P300,000 x 0.7513) P225,390
Interest (P300,000 x 5% x 2.4869) 37,304 262,694
Gain on extinguishment of debt 237,306
Asset swap (see no. 1) 200,000
Total gain on extinguishment of debt P437,306
ANSWER: A
An entity shall remove a financial liability (or a part of a financial
liability) from its statement of financial position when, and only
when, it is extinguished – ie when the obligation specified in the
contract is discharged or cancelled or expires. (PAS 39 par. 39)

An exchange between an existing borrower and lender of debt

instrument with substantially different terms shall be accounted
for as an extinguishment of the original financial liability and the
recognition of a new financial liability. Similarly, a substantial
modification of the terms of an existing financial liability or a
part of it (whether or not attributable to the financial difficulty
of the debtor) shall be accounted for as an extinguishment of the
original financial liability and the recognition of a new financial
liability (PAS39 par. 40)

The terms are substantially different if the discounted present

value of the cash flows under the new terms, including any fees
paid net of any fees receivable and discounted using the original
effective interest rate, is at least 10 per cent different from
the discounted present value of the remaining cash flows of the
original financial liability. If an exchange of debt instrument or
modification of terms is accounted for as an extinguishment, any
cost or fees incurred are recognized as part of the gain or loss on
the extinguishment. If the exchange or modification is not
accounted for as an extinguishment, any costs or fees incurred
adjust the carrying amount of the liability and are amortized over
the remaining term of the modified liability. (PAS 39 PAR 62)

The difference between the carrying amount of a financial

liability for part of a financial liability) extinguishment or
transferred to another party and the consideration paid,
including any non-cash assets transferred or liabilities assumed,
shall be recognized in profit or loss (PAS 39 par.41)