REORGANIZATION AND TROUBLED DEBT RESTRUCTURING - PROBLEM

King company borrowed P300,000 from the Metro bank on December 31, 2013. The interest
rate was 10%, and interest was due and payable December 31, of each year.

According to the terms of the contract, King was required to repay the amount borrowed on
December 31, 2017. Due to financial difficulties in 2016 , King was not able to pay the accrued
interest on December 31, 2016 (it had paid the interest in 2014 in 2015) .

King's debt was restructured in the following way:

1. 70% of the December 31 2016, interest was forgiven.

2. The interest rate was reduced to 8% .

3. Principle of the debt was reduced to 260,000.

4. The due date for the repayment of the principal was delayed until December 31, 2018.

1. What is the current value of King’s debt as of December 31 2016?

a. 260,000

b . 269,000

c . 330,000

d . 300,000

2. What is the total of the future cash flows required to liquidate the debt?

a. 290,000

b . 301,000

c. 310,600

d . 260,000

Solution:

Problem 1
Principal - Notes Payable P300,000

Add: Interest (300,000 × 10%) 30,000

Carrying value of debt P330,000

Problem 2

Restructured Principal of note payable P260,000

Add: Interest Payable

On book value (300,000 ×10% × 30%) P9,000

On reconstructed (260,000 × 8% × 2) 41,000 50,600

Future cash flows to liquidate the debt P310,600