Pamantasan ng Cabuyao

Katapatan Subd., Banay Banay, City of Cabuyao

Accounting Review III - Practical Accounting I (ACCTG100C) P1 - 16

DEBT RESTRUCTURING AND EMPLOYEE BENEFITSSHAREHOLDERS’ EQUITY

1. Debtor Company is indebted to Creditor Corp. under a P5,000,000, 12%, three-year note dated December 31, 2016.
Because of Debtor’s financial difficulties developing in 2018, Debtor owed accrued interest of P300,000 on the note at
December 31, 2018. Under a troubled debt restructuring on December 31, 2018, Creditor agreed to settle the note and
accrued interest for a tract of land having a fair value of P4,300,000. The land is carried at Debtor’s books at its historical
cost of P2,800,000.

What is the amount of gain on debt restructuring should Debtor recognize in 2018?
A.P2,500,000 C.P1,000,000
B. 2,200,000 D. 1,500,000

2. On December 31, 2018, Debtor Company shows the following data with respect to its matured obligation:

Mortgage payable P7,000,000

Accrued interest payable 1,300,000

Debtor enters into an agreement with the creditor for the issuance of common stock in full settlement of the mortgage. The
agreement provides for the issue of 80,000 shares of common stock with par value of P50. The common stock is currently
quoted at P100 per share.

How much should be reported as gain on debt restructuring in Debtor’s December 31, 2018 income statement?
A. P 0 C. P1,000,000
B . 300,000 D. 1,300,000

Questions 3 through 5 are based on the following information:

Debtor Company is indebted to Creditor Company for P15,000,000 on December 31, 2017. The principal and accrued
interest of P3,000,000 are long overdue. The interest on the note is 10%. Debtor Company negotiated with Creditor
Company for the restructuring of the obligation. The results of the negotiation are:

a. The principal obligation is reduced by P1,500,000.

b. The accrued interest of P3,000,000 is waived.
c. The obligation will mature on December 31, 2015.
d. Debtor Company shall pay annual interest of 12%.

The present value of 1 at 10% for two periods is 0.8264 and the present value of an annuity of 1 at 10% for two periods is
1.7355.

3. How much gain on debt restructuring should Debtor Company recognize on December 31, 2017?
A. P1,260,000 C. P4,032,090
B. 1,032,090 D. 0

4. The premium on note payable- new to be recorded on December 31, 2017 is

A. P 467,910 C. P244,701
B. 4,032,090 D. 0

5. The premium amortization for 2018 is

A.P233,955 C. P 0
B. 244,701 D. 223,209

6. Due to adverse economic circumstances and poor management, Debtor Company has negotiated a restructuring to its
P17,000,000 note payable to Secure Bank. There is no accrued interest on the note. The bank has agreed to reduce the
face value of the note from P17,000,000 to P16,000,000, reduce the interest rate from 14% to 10%, and extend the due
date one year from the date of restructuring.

The restructuring will occur on December 31, 2018, the end of Debtor’s accounting period. There is no unpaid interest on
restructured note at this time.

The present value of 1 at 14% for one period is 0.8772 and the present value of an ordinary annuity of 1 for two periods at
14% is 1.6467.

The gain on debt restructuring that should be recognized by Debtor Company on December 31, 2018 is
A. P1,561,280 C. P2,964,800
B. 2,304,640 D. 0
7. DCP Company has a defined contribution plan that covers its existing employees.

The terms of the plan requires DCP to contribute 3 % of the annual employees’ salaries to the retirement plan each year.
The payroll records show the annual salaries as follows:

2017 P7,000,000
2018 8,100,000

The benefit expense for 2017 and 2018 are

2017 2018
A. P210,000 P243,000
B. 0 33,000
C. 210,000 453,000
D. 210,000 33,000

Questions 8 through 11 are based on the following information:

On January 1, 2017, PBO Company agrees to pay a lump sum pension to its employees equal to 5 % of their final salary
times the number of years work after January 1, 2017. It is estimated that the salary of a certain employee for 2026, his
last year with the company, will be P3,000,000. The appropriate interest rate is 12%. The mathematical table shows the
present value of 1 at 12% is as follows:

Period Present Value of 1

7 0.452
8 0.404
9 0.361
10 0.322

8. What is the current service cost related to the employee for 2017?
A.. P 54,150 C. P 60,600
B. 150,000 D. 48,350

9. What is the interest cost related to the employee for 2017?

A. P 0 C. P18,000
B. 6,498 D 7,278

10. What is the current service cost related to the employee for 2018?
A. P 54,150 C. P60,600
B. 150,000 D. 48,350

11. What is the interest cost related to the employee for 2018?
A. P 0 C. P18,000
B. 6,948 D. 7,278

12. At December 31, 2018, the following information was provided by Defined Company’s pension plan administrator:

Fair value of plan assets P 6,900,000

Accumulated benefit obligation 8,600,000
Projected benefit obligation 11,400,000

What is the total amount of pension liability that should be shown on Defined’s December 31, 2018 balance sheet?
A. P 4,500,000 C. P2,800,000
B. 11,400,000 D. 1,700,000

13. On January 1, 2018, Postemployment Company had the following balances in its memorandum records related to a
defined plan:

Fair value of plan assets P2,875,000

Projected benefit obligation 3,250,000

The actuary provided the following information for the year ended December 31, 2018:

Current service cost P 300,000

Interest Cost 10%
Expected and actual return on plan assets 8%
Contribution to the plan 450,000

What is the retirement benefit expense for 2018?

A. P625,000 C. P855,000
B. 395,000 D. 300,000
14. On January 1, 2018, Retirement Company provided the following data in connection with its defined benefit plan:

Fair value of plan assets P3,362,500

Projected benefit obligation 3,800,000

The accountant revealed the following information for the year 2018:

Current service cost 725,000

Interest cost 10%
Actual return on plan assets 250,000
Expected return on plan assets 8%
Contribution to the plan 750,000

What is the balance of Prepaid/Accrued Benefit Cost on December 31, 2018?

A. P523,500 C. P542,500
B. 725,000 D. 475,000

Questions 15 and 16 are based on the following information:

On January 1, 2018, Pension Company has defined benefit plan with the following details:

Expected Actual
Fair value of plan assets P2,000,000 P2,750,000
Projected benefit obligation 2,400,000 2,500,000

Other relevant information for 2018 is as follows:

Current service cost 875,000

Interest cost 350,000
Contribution to the plan 750,000
Expected and actual return on plan assets 8%
Average service period of employees 10 years

15. What is the remeasurement on January 1, 2018?

A. P650,000 C. P750,000
B. 850,000 D. 0

16. What is the employee benefit expense for 2018?

A. P1,005,000 C. P967,500
B. 840,000 D. 875,000

17. On January 1, 2018, Rich Company provided the following data in connection with a defined benefit plan:
Fair value of the plan assets P6,700,000
Projected benefit obligation 7,600,000

The accountant revealed the following information for the current year:

Current service cost P1,450,000

Past service cost 300,000
Discount rate 10%
Actual return on plan assets 500,000
Contribution to the plan 1,500,000
Benefits paid to retirees

REQUIRED:
a. Determine the employee benefit expense for the current year.
b. Determine the “remeasurement” on December 31, 2018 to be recognized as component of other
comprehensive income.
c. Prepare journal entry to record the employee benefit expense.
d. Compute the balance of Prepaid/Accrued Benefit Cost on December 31, 2018.
e. Reconcile the general ledger of the entity with the memorandum ledger.

18. On January 1, 2018, Peter Company reported the following information in relation to a defined benefit plan:
Fair value of the plan assets P6,500,000
Projected benefit obligation 7,500,000

During the current year, the entity determined that the current service cost was P1,200,000 and the discount rate is 10%.
The actual return on plan assets was P800,000 during the year.
 Other related information during the year is as follows:
Contribution to the plan P1,200,000
Benefits paid to retirees 1,500,000
Decrease in projected benefit obligation due to changes
in actuarial assumptions 200,000

REQUIRED:
a. Determine the employee benefit expense for the current year.
b. Determine the “remeasurement” on December 31, 2018 to be recognized as component of other
comprehensive income.
c. Prepare journal entry to record the employee benefit expense.
d. Compute the balance of Prepaid/Accrued Benefit Cost on December 31, 2018.
e. Reconcile the general ledger of the entity with the memorandum ledger.

19. Charot Company provided the following information concerning a defined benefit plan on January 1, 2018 prior to the
adoption of PAS 19R:
Debit Credit
Fair value of the plan assets P4,750,000
Unamortized past service cost 1,250,000
Projected benefit obligation P5,500,000
Unrecognized actuarial gain 850,000
The transactions for the current year relating to the defined benefit plan are as follows:
Current service cost 925,000
Discount rate 6%
Actual return on plan assets 485,000
Contribution to the plan 1,350,000
Benefits paid to retirees 995,000
Increase in projected benefit obligations due to changes
in actuarial assumptions 150,000

Effective January 1, 2018, the entity has applied the provisions of PAS 19R in relation to the defined benefit plan.
REQUIRED:
a. Prepare journal entry to recognize the transitional effect of adopting PAS 19R.
b. Determine the employee benefit expense for the current year.
c. Determine the “remeasurement” on December 31, 2018 to be recognized as component of other
comprehensive income.
d. Prepare journal entry to record the employee benefit expense.
e. Compute the balance of Prepaid/Accrued Benefit Cost on December 31, 2018.
f. Reconcile the general ledger of the entity with the memorandum ledger.

20. On January 1, 2018, Poorita Company provided the following information in relation to a defined benefit plan:
Fair value of plan assets 6,000,000
Projected benefit obligation 5,000,000
Prepaid/Accrued Benefit Cost 1,000,000
Asset ceiling 700,000
Effect of asset ceiling 300,000

During the current year, the following data are gathered:

Current service cost 700,000
Actual return on plan assets 900,000
Contribution to the plan 1,000,000
Past service cost 200,000
Decrease in projected benefit obligation due to
change in actuarial assumptions 500,000
Asset ceiling on December 31, 2018 1,200,000
Discount rate 10%
REQUIRED:
a. Determine the fair value of the plan assets on December 31, 2018.
b. Determine the projected benefit obligation on December 31, 2018.
c. Determine the effect of asset ceiling on December 31, 2018.
d. Compute the employee benefit expense for the current year.
e. Compute the “remeasurement” on December 31, 2018 to be recognized as component of other
comprehensive income.
f. Prepare journal entry to record the employee benefit expense.
g. Reconcile the Prepaid/Accrued Benefit Cost account on December 31, 2018.

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wep/acctng100c/debtrestructuring/employeebenefits