8/8

Question 1
On January 1, 2012, the Baby Blue Eyes (BBE) Corporation is delinquent on a P300,000 note
to the Rocket Bank on which P72,000 of interest has accrued. On January 2, 2012, BBE
enters into a debt restructuring agreement with the bank. In each independent situations,
answer what is required of each.

1. The bank accepts 10,000 shares of BBE's P10 par ordinary share that is currently selling for
P35 per share in full settlement of debt. The APIC on ordinary share is P 250 000Correct.;
The gain on debt restructure is P 22 000Correct.

2. The bank accepts land with a fair value of P342,000 in full settlement of the debt. The land
is being carried on BBE's books at a cost of P324,000. Under US GAAP, the gain on exchange
is P 18 000Correct. and the gain on debt restructuring is P 30 000Correct.

3/3
Question 2
On January 1, 2013, Beautiful Soul Corporation signed a P100,000 non-interest bearing note
due in three years at a discount rate of 10%. Beautiful Sould elects to use the fair value
option for reporting its financial liabilities. On December 31, 2013, Beautiful Soul's credit
rating and risk factors indicated that the rate of interest applicable to its borrowings was 9%.
The PV factors at 10% and 9% are as follows:

10%: 3 periods = 0.751; 2 periods = 0.826; 1 period = 0.909

9%: 3 periods = 0.772; 2 periods = 0.842; 1 period = 0.917

At what amount should Beautiful Soul present the note on the December 31, 2013
statement of financial position? P 84 200Correct.

9/9
Question 3
Naraku Corporation is having financial difficulty and therefore has asked Inuyasha Bank to
restructure its P3 million note outstanding. The present note has 3 years remaining and pays
a current rate of interest of 12%. The note was issued at its face value.

The following present value factors are abstracted from the present value tables.

12% 10%
Present value of 1 for 3 periods 0.71178 0.75132
Present value of an ordinary annuity of 1 for 3 periods 2.40183 2.48685
Presented below are two independent situations. Give the requirement of each.

Inuyasha Bank agrees to accept land in exchange for relinquishing its claim on this note. The
land has a book value of P2,000,000 and a fair value of P2,500,000. The gain on debt
restructuring is P 1 000 000Correct.
Inuyasha Bank agrees to reduce the principal balance due to P2,000,000 and interest rate to
10%. The discount on notes payable is P 96 074Correct.. The gain on debt restructuring is P
1 096 074Correct..
4/4
Question 4
On January 1, 2011, Ha Company purchased equipment from Hakdog Distributors. There
was no established market price for the equipment which has a 10-year life and no salvage
value. Ha gave Hakdog a P200,000 zero-interest bearing note payable in 5 equal annual
installments of P40,000, with the first payment due in December 31, 2011. The prevailing
rate of interest for a note of this type is 9%. The present value of the note at 9% was
P144,200.

Assuming that Ha Company uses the straight-line depreciation, the 2011 interest expense is
P 12 978Correct. and the depreciation expense for the equipment is P 14 420Correct..

3/3

Question 5
On January 1, 2014, Marie Keith Company borrowed P500,000, 8% noninterest bearin gnote
due in four years. The present value of the note on January 1, 2014 was P367,500. Marie
Keith elects the fair value method for reporting its financial liabilities. On December 31,
2014, it is determined that the fair value of the note is P408,150.

At what amount should the discount on notes payable be presented in the statement of
financial position on December 31, 2014?

P 0Correct.

6/15
Question 6
Lifetime Industries is an internationally acclaimed furniture manufacturer in the country. To
support its increasing demand for his world class furniture, the company negotiated for a
loan agreement with Alvin N Vin Bank in 2009 to finance its expansion project and was
awarded a 10-year loan of P6,000,000 at 9% interest rate payable every December 31. The
company's 1 hectare factory in Cebu costing P20,000,000 with accumulated depreciation of
P4,000,000 was pledged as collateral to secure the loan. The company keeps its interest
payment obligation in 2009, 2010 and 2011.

The year 2012 however was not kind to Lifetime due to several natural calamities that
interrupted its operation, losing clients along the way. In addition to that, the export market
has clinched its profit margin due to unfavorable foreign currency exchanges. As early as
September 2012, the company negotiated with Alvin N Vin Bank to ease his financial burden
and the following were the terms agreed upon by the parties on December 31, 2012.
Half of the loan will be settle through the transfer of the company's building costing
P3,500,000 purchased in the first half of 2008 depreciated straight line for 10 years. The
market value of this building doubled in 2012. Transfer was successfully done on December
31, 2012. As of December 31, 2012, the accumulated depreciation of this building to be
debited is P 1 750 000Incorrect. Correct answers:1 575 000, 1,575,000; the gain or (loss) on
debt restructuring is P 270 000Incorrect. Correct answers:1 345 000, 1,345,000
Another half of the loan will be swapped with 15,000 shares divided 60-40 between ordinary
(par value of P100 and market value of P150/share) and 8%, P125 par, preference shares
having a market value of P200/share. Stocks certificates were issued by December 31, 2012.
As of December 31, 2012, the Share Premium Ordinary is P 450 000Correct.; the Share
Premium Preference is P 450 000Correct.; the Gain or (loss) on extinguishment of debt is P
450 000Incorrect. Correct answers:720 000, 720,000
3/3

Question 7
Laserlight Company started a contest with a winning prize in the form of cash payments for
20 years for the totala amount of P1,000,000. On December 31, 2013, Laserlight announce
the winner of the contest and signed a note payable to the winner for P1,000,000, payable
in P50,000 installments every January 2. Also on December 31, 2013, the company
purchased an annuity for P418,250 to provide the P950,000 prize monies remaining after the
first P50,000 installment that was paid in January 2, 2014.

On December 31, 2013 statement of financial position, what amount should Laserlight
report as note payable, net of current portion?

P 418 250Correct.

3/3
Question 8
KLWKN Company acquired two items of machinery as follows:

On December 30, 2009, KLWKN purchased a machine in exchange for a non-interest bearing
note requiring ten payments of P500,000. The first payment was made on December 30,
2010 and the others are due annually on December 30. The prevailing rate of interest for
this type of note at date of issuance was 12%.
On January 1, 2009, KLWKN acquired used machinery by issuing the seller a two-year, non-
interest bearing note for P3,000,000. In recent borrowing, KLWKN has paid a 12% for this
type of note.
What is the total cost of the machinery? (Use 2 decimal places for PV factor, and round off to
nearest whole number for the final answer)

P 5 225 000Correct.
0/3
Question 9

Pink Skies Company, having experienced financial difficulties in 2007, negotiated with a
major creditor and arrived at an agreement to restructure its notes payable on December
31, 2007. The creditor was owed principal of P3,600,000 and interest of P400,000 but agreed
to accept equipment worth P700,000 and note receivable from a Pink Skies Company’s
customer with carrying amount of P2,700,000. The equipment had an original cost of
P900,000 and accumulated depreciation of P300,000.

How much should be recognized as gain from debt restructuring on December 31, 2007?

P 600 000Incorrect. Correct answers:700 000, 700000

2/2
Question 10
On January 1, 2010, Macrosoft Company sold property to Doors Company which
originally cost Jacobs P760,000. There was no established exchange price for this property.
Doors gave Macrosoft a P1,200,000 zero-interest-bearing note payable in three equal annual
installments of P400,000 with the first payment due December 31, 2010. The note has no
ready market. The prevailing rate of interest for a note of this type is 10%. The present value
of a P1,200,000 note payable in three equal annual installments of P400,000 at a 10% rate of
interest is P994,800.

What is the amount of interest income that should be recognized by Macrosoft in 2010,
using the effective-interest method? P 99 480Correct.

15/15
Question 11
AKOTOSHI CORPORATION is having financial difficulty and therefore has asked Natoy Bank to
restructure its P3 million note outstanding. The presented note has 3 years remaining and
pays a current rate of interest of 10%. The present market rate for a loan of this nature is
12%. The note was issued at its face value.

Presented below are four independent situations. Answer the questions provided by each.

1. Natoy Bank agrees to take an equity interest in Akotoshi by accepting common stock
valued at 2,400 in exchange for relinquishing its claim on this note. The common stock has a
par value of P1,200,000. The APIC is P 1 800 000Correct.

2. Natoy Bank agrees to accept land in exchange for relinquishing its claim on this note. The
land has a book value of P2,000,000 and a fair value of P2,500,000. The gain on exchange is
P 500 000Correct.. The gain on debt restructuring is P 500 000Correct.

3. Natoy Bank agrees to modify the terms of the note, indicating that Dolores does not have
to pay any interest on the note over the 3-year period. The net adjustment is P 0Correct.

4. Natoy Bank agrees to reduce the principal balance due to P2,000,000 and require interest
only in the second and third year at a rate of 10%. The gain on debt restructuring is P 600
000Correct.