PROBLEM 6-1

Requirement 1: Prepare the entry to record the issuance of the notes on December 31, 2018.

Face Value of Notes Payable Php 2,400,000.00

Present Value of Notes Payable (2,400,000*0.68301) 1,639,224.00
Discount on Notes Payable Php 760,776.00

General Journal
Page Number 01
Date Descriptions PR
Debit Credit
12/31/2018 Equipment 1,639,224
Discount on Notes Payable 760,776
Notes Payable 2,400,000
To record the issuance of the notes

Requirement 2: What is the equipment’s book value on December 31, 2020?

Equipment (2,400,000*0.68301) Php 1,639,224.00

Salvage Value -300,000.00
Depreciable Amount Php 1,339,224.00
Multiplied by Used Life 2/5
Accumulated Depreciation Php 535,689.60

Present Value of Equipment Php 1,639,224.00

Accumulated Depreciation 535,689.60
Book Value on December 31, 2020 Php 1,103,534.40

Requirement 3: What is the carrying value of the notes payable at December 31, 2020?

Date Interest Discount Present Value

12/31/2018 Php 760,776.00 Php 1,639,224.00
12/31/2019 Php 163,922.40 Php 596,853.60 Php 1,803,146.40
12/31/2020 Php 180,314.64 Php 416,538.96 Php 1,983,461.04
12/31/2021 Php 198,346.10 Php 218,192.86 Php 2,181,807.14
12/31/2022 Php 218,180.71 Php 12.14 Php 2,400,000.00

Carrying value of the notes payable - December 31,2020 Php 1,983,461.04

PROBLEM 6-2
Requirement 1: Prepare the appropriate journal entry by HOPE Company to record the issuance of the note.

General Journal
Page Number 01
Date Descriptions PR
Debit Credit
1/8/2020 Cash 9,200,000
Discount on Notes Payable (10,000,000*12%*8/12) 800,000
Notes Payable 10,000,000
To record the issuance of the note

Requirement 2: Prepare the adjusting entry on December 31, 2020.

General Journal
Page Number 01
Date Descriptions PR
Debit Credit
12/31/2020 Interest Expense 500,000
Discount on Notes Payable (800,000*5/8) 500,000

Requirement 3: Present the note payable on December 31, 2020 (Financial Statement Presentation).

Notes Payable Php 10,000,000.00

Discount on Notes Payabe (800,000-500,000) -300,000
Carrying Amount - December 31, 2020 Php 9,700,000.00
Requirement 4: Prepare the journal entry to record the discount amortization and payment of the note payable on April 1, 2021,
date of maturity.

General Journal
Page Number 01
Date Descriptions PR
Debit Credit
1/4/2021 Interest Expense 300,000
Discount on Notes Payable (800,000*3/8) 300,000

1/4/2021 Notes Payable 10,000,000

Cash 10,000,000

Requirement 5: Suppose the note had been structured as a 12% note with interest and principal payable at maturity.
Prepare the appropriate journal entry to record the issuance of the note by HOPE Company.

General Journal
Page Number 01
Date Descriptions PR
Debit Credit
1/8/2020 Cash 10,000,000
Notes Payable 10,000,000

Requirement 6: Prepare the appropriate journal entry on December 31, 2020 to accrue interest expense on the note
described in requirement no. 5.

General Journal
Page Number 01
Date Descriptions PR
Debit Credit
12/31/2020 Interest Expense (10,000,000*12%*5/12) 500,000
Accrued Interest Payable 500,000

Requirement 7: Prepare the journal entry to record the payment of the note payable described in requirement no.5 on the
date of maturity.

General Journal
Page Number 01
Date Descriptions PR
Debit Credit
1/4/2021 Interest Expense (10,000,000*12%*3/12) 300,000
Accrued Interest Payable 500,000
Notes Payable 10,000,000
Cash 10,800,000

PROBLEM 6-3
Requirement 1: Prepare the journal entry on the books of Surviving Company to record the settlement of the note payable:
If the fair value of the equity instrument is used.

Fair Value of Ordinary Shares (450,000*15) Php 6,750,000.00

Fair Value of Preference Share (37,500*90) 3,375,000.00
Fair Value of Shares Issued Php 10,125,000.00

Fair value of Ordinary Shares (450,000*15) Php 6,750,000.00

Par Value of Ordinary Shares (450,000*7.5) -3,375,000.00
Share Premium on Ordinary Shares Php 3,375,000.00

Fair Value of Preference Shares (37,500*90) Php 3,375,000.00

Par Value of Preference Shares (37,500*15) -562,500.00
Share Premium on Preference Shares Php 2,812,500.00

Carrying Amount of Notes Payable (7,500,000+600,000) Php 8,100,000.00

Fair Value of Shares Issued -10,125,000.00
Loss on Extinguishment of Debt Php -2,025,000.00

General Journal
Page Number 01
Date Descriptions PR
Debit Credit
12/31/2020 Notes Payable 7,500,000
 Accrued Interest Payable 600,000
Loss on Extinguishment of Debt 2,025,000
Ordinary Share 3,375,000
Share Premium on Ordinary Share 3,375,000
Preference Share 562,500
Share Premium on Preference Share 2,812,500

Requirement 2: Prepare the journal entry on the books of Surviving Company to record the settlement of the note payable:
If the fair value of the liability is used.

Carrying Amount of Notes Payable (7,500,000+600,000) Php 8,100,000.00

Fair Value of the Liability -7,200,000.00
Gains on Extinguishment of Debt Php 900,000.00

Fair Value of the Liability Php 7,200,000.00

Par Value of the Payable (3,375,000+562,500) -3,937,500.00
Share Premium Php 3,262,500.00

General Journal
Page Number 01
Date Descriptions PR
Debit Credit
12/31/2020 Notes Payable 7,500,000
Accrued Interest Payable 600,000
Ordinary Share 3,375,000
Preference Share 562,500
Share Premium 3,262,500
Gain on Extinguishment of Debt 900,000

Requirement 3: Prepare the journal entry on the books of Surviving Company to record the settlement of the note payable:
If the carrying amount of the financial liability is used.

Carrying Amount of Notes Payable (7,500,000+600,000) Php 8,100,000.00

Par Value of the Payable (3,375,000+562,500) -3,937,500.00
Share Premium Php 4,162,500.00

General Journal
Page Number 01
Date Descriptions PR
Debit Credit
12/31/2020 Notes Payable 7,500,000
Accrued Interest Payable 600,000
Ordinary Share 3,375,000
Preference Share 562,500
Share Premium 4,162,500

PROBLEM 6-4
Requirement: Prepare the journal entries for 2020 and 2021 to record the modification of terms.

Present Value of the Principal (3,500,000*0.8573) Php 3,000,550.00

Present Value of the Interest Payments (3,500,000*10%*1.7833) 624,155.00
Present Value of the New Note Payable Php 3,624,705.00
Face Value of the New Note Payable -3,500,000.00
Premium on Note Payable Php 124,705.00

Note Payable- Old Php 4,000,000.00

Accrued Interest Payable 320,000.00
Carrying Amount of Old Liability Php 4,320,000.00
Present Value of the New Note Payable -3,624,705.00
Gain on Extinguishment of Debt Php 695,295.00

Date Interest Paid Interest Expense Premium Amortization Carrying Amount

1/1/2020 Php 3,624,705.00
12/31/2020 Php 350,000.00 Php 289,976.40 Php 60,023.60 Php 3,564,681.40
12/31/2021 Php 350,000.00 Php 285,318.60 Php 64,681.40 Php 3,500,000.00

General Journal
Page Number 01
Date Descriptions PR
 Date Descriptions PR
Debit Credit
1/1/2020 Notes Payable 4,000,000
Accrued Interest Payable 320,000
Notes Payable- New 3,500,000
Premium on Notes Payable 124,705
Gain on Extinguishment of Debt 695,295

12/31/2020 Interest Expense (3,500,000*10%) 350,000

Cash 350,000

12/31/2020 Premium on Notes Payable 60,023.60

Interest Expense 60,023.60

12/31/2021 Interest Expense 350,000

Cash 350,000

12/31/2021 Premium on Note Payable 64,681.40

Interest Expense 64,681.40

12/31/2021 Notes Payable 3,500,000

Cash 3,500,000