Problem 8.21 (AICPA Adapted) n July 1, 2014, Justine Company borrowed P1,000,000 on 10% fivesjoneanterect ‘bearing note, On Deceraer 1, 20 ‘the file value ofthe note ts dstermined to be BOS, 000 ‘ntity has elected the fair value option. On Dectiuber 4 2014, what amounte should be prerentad respectively Interest expense, note payable aad gein for the note? 100.000 and 100000 and 0 & too000 and “18000 and 25,000, © "50000 and 978.00) nd 25.000 70 Gnd 978.000 ad 75.000 Problem 8-22 (AICPA Adapted) Qn January 1. 2014, Jonathan Company borrowed P500, ‘5% noninterest: beating note due in four yoors, The ‘alu of the note on the dete of tesuanco was B967.800. ‘lity has elected the fale value option’ On Decaber 4 014: cho tur value ofthe noce is PADH TSO, At what amo Should the discount on note payable be presented ber 31, BOLI? a 133.500, tostoo 191850 a ° Problem 6-23 (AICPA Adapted) On January 3, 2014, Lizel onintereat-bearing note duo in three yours at & disci ate of 10%, The encley has eloctad the fair value 0 ‘GrDecomber 81, 2014, the risk factors indicated ent rate of interest applicable to the borrowing wan 99 [resent value factors a¢ 10% and 9% ate us fellows PV factor 10% aperiods 751 FV iacior 9%, Speriode PViclor 10m Eperods 36 FV faotor 9 2periode PViacter 10m {pered’ 909 PYinctor 9% Toerod What is the carrying amount of the note payable of Decomber'31, 29187 ron 75,100 Fa e610 54.200 torr CHAPTER 9 DEBT RESTRUCTURE Definition restructuring is situation where the creditor, for conta ot tga toasone related tho debtor Snancal Alttoutes grants the ebinrconceaion Chat woul not caherwis be granted n'a normal bucnore relation. "The concession either stems from an agrooment between the creditor and debtor, of ls imposed by law or a court. ‘The objective of the ereditor in a debt restructuring ie to inake the bert ofa bad situation or maximize rooovery of ‘Thus, the creditor ueually sustains aesounting los on debt estructuring and the debtor usually realizes accounting gun ‘Types of debt restructuring ‘There are three types of debt restructuring, namely: 1. Asset awn 2 Beauty swap 8. Modification of tormsAsset swap, ‘Aa “nssot swap" isthe transfor by the debtor t the eneditor ‘of any asset, such as real estate inventory, receivables and Investment, im full payment of an obligation, Under PFRS 9, paragraph 3.3.1, asset wwap is tested a @ . noua of the carrying amount of the debt over the fair valve of the astat ce. Bxcces ofthe fair valve ofthe asset over the carrying amount of the debe 44. Exceas of the carrying amount of the debt over the ereying amount of Ube asbet 5, Bxplain the accounting procedure for @ dacion on pa 6 Distinguish an aeact swap feom dacion en pago 7. Explain beiey an equity swap, B.Explain the initial measurement of 1 instruments taqued in anequityewap, ‘PS aH 2.¥or a debt restructuring involving substantial {modification of terme, itis appropriate for a debtor to Fecounize a gain when che caveying amount of the debt 9. Explain briefly modification af terms, 10. Exphuin che accounting for substantial modification ‘a. Exceeds the total future ensh payments epeciiod by the new torms. by, Ie lees than the total future cash payments specified by the new tors, ce. Exceeds the prestntvalue ofthe future cash payments specified by the new term 4. Te'lose than the present value of the future cash payments specified by the new terme 11 Fxplain the accounting for nonsubstantial modification 8 na dobt extinguishment in which the debt is continued ‘with modified forms and the carrying amount of the debt nore than the fair valve of the debt [A loss should be recognized by the debtor. 1A new effective interest rate taut be computed [A pain should bo recognized by the debtor Ne interest expense should bo recognized in the future4.Under a debt restructuring involving subs morlification of terms, the future cash flows un new terme should be discounted using Original effective interest rate 1 Interest rate under the new terme ©. Market rate of intereet 4. Prime intarest rate 5.qThere is gubstantial modification of terms of ‘SnancialLabiigy if the gain or loce on extingviaha & Atleast 10% of the carrying amount of the old li 1b Lass than 10% ofthe carrying amountof the ald ©. Atleast 10% of the new liability 4. Less than 10% of the new habit Problem 9-2 Multiple choice (IFRIC 19) 1. An entity shall Initially mossure equity insteum ‘sued to extinguish all er pare of a fitancial Habit Fair value of tho equity instruments issued 1b Fair Value ofthe lability extinguished © Par value of the equity snstramonts ised Carrying amount ofthe lability extinguished 2. If the fair valuo ofthe equity instruments issued ean te reliably measured. the equity instruments jeeued. extinguish a financial lability shall be measured at Par value of the equity instrsments tasued Carrying amoune of the liability extingw Book valuo of the equity instruments iseued 336 Carrying amount ofthe iabity extinguished Bi Dar value of equity snstrumente issue ©: Book value of the equity instruments issued 4. Value aenigned by the Board of Directors utterence between tho carrying amount of the Fessler extinguished sd te fr value of eity an aed or fur vue habiey extagen ance of the fair value of equity instants Ioued shal be recognized in 1 Profit or loss b. Other comprehensive income ©. Retained earnings 4. General roeorve Pastis Seimei rt eee fa. Other insome or other expense Separate line item in profit oF loss 2: Component of other comprehensive income 4G. Component of nance cost 337Problem $-$ (ACP) Youth Company’ isin financial trouble and could not imataringdnatllmente and interest on its bar Toa 0.0 served snverost on the loan to date te ‘The entity and the bank agrood one “dacion ex pags arrangement, Thus, the mortgaged Nand snd building were sven bythe entity ae full pastent for tho loan toeludiag ‘The cost ofthe land is PI, 500,000 and the brilding. P6,000,000) with accumulated depreciation of P1,800,000. The far sala | of the land and building is about ?3,800,900, Required: 1 Compute tho gain oF Iona oa extinguishment of ded. 2. Prepare journal entry to reoord the “dacion en page” Problem 9-4 (ACP) Rainbow Company showed the following balances on December 31, 2014: “4 Not psec Deomter 3.2014 10990 Accrued interest payable - 200,000 ‘The entity is in Gnancinl datees and negotiates with ‘ereditor for the settlement of the note payable. a Consequenty, he entity transfered a patent to the ereitor {full saifation of tho now payatier The patent hee a Serving amount f PO00000 ands fate vale of P1 HDGSOO. Required: Prepare journal entry fo record the ast wap on the bask of Rainbow Company. eel 1. Under PFRS 9 2 Under USA GAAP, 338 Problem 9-5 GAA) undown Company haa bonds payable with face value of ‘600,000 as carey rout ef P,100,000" Ta adlton, {inp intersaton the bords has been accrued inthe amount r'P300,000. The credizor has agreed to the settlement of ‘he bonds payable in exchange for land with Tair value of $Pi500,000, The Tsnd bas a hastorial coat of 3200000 Required: Psspare journal eatey necessary on the books of Sundown (Company ta record the settlement of the bonds payable, Problem 9-6 (AA) (On December 31, 2014, Sunshi {olloming daca seth roepact to a moxtured obligation: 4,000,000 eveielaree parable aaa ‘Vhe entity sx threstoned with a court sult if t could net pay’ ts maturing debt. Accordingly, tho entity entored into. an Sesrement with the oreditr Sor the eauance of share capital {2 fll setedement of the mortaas Company showed the “Tho agreement provided for the insue of 38,000 shares with par value of PI00. The sare is currently quoted at P10, "The fair value of tho tility i P4,500,000. Required: Prepare journal entry t record the equity swap on the books of Suskine Company’ 1. Ifthe fair value of the sate capital in uned forthe equity 2. fake fur ealvo ofthe liability used forthe equity wap. 2 If the eaerying amount of tho Liability i usod for tho equity wap.‘Problem 9-7 (IAA) ‘Star Company has outstanding a PE,000,000 note payable to fn investment entity. Accrued interent payable on this note ‘amounted ta P600,000. Because of financial dificulties, the entity negotiated with the investment entity exchange inventory af machine parts ta satiny the deb. The inventory ransferred is earried of 3,600,000. "The estimated retail ‘value ofthe inventory is P5,600,000. The perpetual inventory {yatem ie used, Required: Prepare journal entry neceseary on the hooks of Star Company to record the settlement of the note payable Problem 9-8 (AA) ‘Quest Company is threatened with bankruptey due to the Inability to meet interest payments and fund sequiremonts to retire 5,000,000 note payable with sccrved interest payable of 400,000. Tho entity har entered into an agreement with the croditor to exchamgn eqully instruments for the financial ability. The terme of the exchange are 300,000 cedinary shaves with PS par value and P10 market valu, and 25,000 preference shares with P10 par value and ‘P60 market value. ‘The fair value of the lability ts P4,800,000 Required: Prepare journal entry on the books of Qu ~t Company ‘record the settlement of the note payable: an 1. the fale value ofthe equity instruments is use. 2 he fair value of the lnbiliy i weed 8. I the caring amount of the nancial liability i used. 40. Problem 9-9 (AA) unset Company’ has bonds payable with face value of 6,0, 000 and # earring amount of 4,800,000. tn adeton,| ‘inp interest onthe bonds hsa been aoerued in the smownt St P251,000. The creditor has agreed to the settlement of the bose payable in exchange for 60,000 shares of PSO par value, The shares have a current markt vale of P 4,500,000, ‘The fair value of the bonds payable ie P 4,600,000. Required: Prepare journal entry on the booke of Sunset Company to ‘ecard the settlement of the bonds payable 1 Ifthe fate valuo ofthe equity instruments is wood. 2. If the fair value ofthe bonds is veo ree arte ee ener tear ee Problem 9-10 (IAA) ‘Haus Comber is Soieeebting edit Welt ay renegotiating debt restructuring with ite eroditor to relieve its financial stress ‘The entity hae P5,000,000 note payable to Firet Bank ‘The bank is considering two alternatives 1. Acceptance of land owned by the entity valued at 'P4,000,000 and carried tite niatorieal cont of P2800, 000. 2. Ascapeance of an equity intorest im the ontity in the frm ‘of 40.000 shares wih fair value of PA20 per shace, The have capital has = par valve of P100 per share Required: Prepare journal entey that Baguio Company would make tinder aoth alternative aaProblem 9-11 (AICPA Adapted) Colt Company. ix indebted to Kent Company’ under 8.000.000, "10% d-sear note dated December 3, Soi Interest of P800,000 was paid on December 3 2012 ae ya During 2014 Colt Company experienced tinane ‘ificulties and is likely to dofaull unless concoseiong made. On December 31, 2014 Kent Company minned restructure the debt as follows Interest of P800,000 fr 2014, due December 31, 2014 ws sade payable December 22,2015 st for 2015 was waived. The principal amount wats reduced to P7,000,000. Required: Propare journal entry to record the debt restructuring om ‘ho books af Colt Company following USA GAA Problem 9-12 (AICPA Adapted) Grey Company has an overdue 8% note payable to City Banke ‘8 PS,000,000 and recorded accrued snteneat ot Roscoe As a result ofa sottlems wonton January 1, 2014, City Bank ‘agroed to the flowing Reduced the principal obi a ion to P7,000,000, b. Forsave the P610,000 accruod interest. Extonded the maturity date to December 51, 2015, Annual interest of 10% is to bo paid on Decomber 31, 2o1¢ and 2016 ‘Tho present value of 1 8% for two periods ix 0.8075, and tho present value ofan ordinary annuity of Lat She fa Say periods se 1.7898. aan Required: 1. Prepare journal entry to record the modification of terms 4, Prepare journal entrios for 2015 annus incre {he bookee ef Grey Company. 2. Propare journal entry to record interest payment on Deaembor 31, 2014 8. Prepare journal entey to rocord amortization, if any. ‘tnd amortization and the principal payment on December 31,2015. Problem 9-13 (AICPA Adapted) xsuary 1, 2014, Sunrise Company is experiencing extreme ‘ancl ponte ain dit motne neon payne lng term mow of 6,000,000 duc on December 31, 20 ‘The intovest rate in 12% payable evory December &i. The (tore ineret payable om Janay 1, 2014s PT20,000. Im an agreoment with the oreditor, the entity obtained the following ehangos in the terme of note: sry 1, 2014 forgiven. ‘he acerued intrest on January 1 Th reduced by 0,600, Fee eee cat vate a 8% paseble every December 3 ‘The now date of matorty ix December 3, 207 8 and ‘The present value of 1 at 12% for four periods is 0.635 the provent value of an ordinary annuity of 1 at 12% fr four periods ia 3.0873, Required: 1. Prepare journal entry to recoed the modification of terms ondanuary 1, 2014, 4 payment nd 2. Propare journal ontzy to record the interest pay ‘tmurization of discount for 2014Problem 9-16 (AICPA Adapted) Problem 9-14 GAA) ‘On December 31, 2014, Mark Company entexed sno @ debt enteaeturing ngreement with dana Company which was ccperioneing financial dalfculion Due to advorse economic circumstances and management, Dontoc: Company haa, aegotated, {estructuring of F8,500.000 note payable te Second Bank. ‘There is no nccruod interest onthe hots, The bask has agro tg coduce the faco value of the note frou PB800,000) 'Pi,000,000, reduce sho intoest fate from 14% to 10% ‘extund tho dio date one year from date of setructuring Mark Company restructured a 1,000,000 note receivable te follows + Reduced tho principal obligation to P700,000. + Forgave P120,000 of accrued incerest ‘thie time, Extended maturity date from December 31, 2014 to alldiis L646? December 31, 2016, Require, + Roduced the interost rate from 12% to 836, Interest ie payable annually on Decomber $1, 2019 and 2016, ‘Prepare journal entsies for the cucrent your eee unity, two eas oe 78896 Ordinary enn twa ers ‘ence White Company is indobed to Black Company for P5,000,000 fon January 1, 2014. The principal and nctracd iniorest of 1,000,000 are long eversue, The interest onthe nove fe 10% ‘The entity negotiated with Black Company for the restructuring of th cbligacen. The results of the negotiation Required: 1. Prepare journal entris for 2014, 2018 and 2016 to resord | the debe restructuring of the books of Jane Company, Gebter) ‘8. The principal obligation te reduced by P500,000, I The nccrued interest of P,000,000 is waived, © The obligation wil mature on Decomber 31, 2015, The entity shall pay am annual dered of 12% every December 81 2, Prepare journal entries for 2014, 2015 and 2016 to record the debr restructuring on the books of Mark Corppany (creditor. ‘The present value of 1 at 10% for two periods is 0.8264 and the present value of an ordinary annuity of Lat 10% for to periods ie 17355. Required: Prepare journal entries for 2014Problem 9-17 (AICPA Adapted) Hull Company ix indebted to Apex Company under » 5,000,000, 12%, three-year nate dated Deezer 31, 012" Because of financial difficultioe developing in 2014, Hull Company owed accrued interest of PSD),000 on the note of Decembar 3, 2014, Under a debt restructuring om December 31, 2016, Apex Company agreed to setle the note aad ascrwedintoroot foe 4 tract of land having a fase value of P4,300,090. The Aquisition cost ofthe land ie P2,600,000, What amount of pretax gain on extinguishment sould Hull Company report a component of income fram continuine ‘operations ia 2014? 2. 2.000.000 1.400.000 © 1200000 4. “oo0.000 Problem 9-18 (AICPA Adapted) ‘The following information pertsins to the transfer of real estate pursuant to 4 debt restructusiog by Knob Company to Mene Company in full liquidation of Knob Company's ability to Mene Comoany: Carmi amonnt oft iui 300000 Fair vale fal etate tansfrsed Tene What amount of protax gain should Knob Company ropert as component of income ftom eontinuing operations? 300000 500.000 © 200,000 46 Problem 9-19 GAA) Versatile Company, after having experienced fiaancial ‘Mies in 2014; negstinted wit sah erode ad firvived ae an agacomomt to Tostructure a hate Payable ox Decombes 21, R014. The ereditcr war awed principal of P5.800,000 and interest of P400,000 but meree o> nccopt Squipment worth P700,000 aad note receivable from = MSrentile Company's customer with carrying amount of 1P2:700,000, Te equipment had an oririnal coat of POO 000 Sind aceumulated Seprectaton of PS00.000. Was xmount hould be recognised as gain fom extinguishment of debt ‘on December 81, 20147 700.000 & on.000 400.000 & ° Problem 9-20 (AICPA Adapted) Due to extreme nancial dficukiee, Armada Company had Dopotited a rertrvetsring of = 10% PS,000,000 note payable ‘us on December Si, S004. The Unpaid Satesest on the mote ‘on such date was P&O0,000, The cheditor agreed to reduce the face valuo to 4,000,000, forgive the unped intorest, ‘Ssiuce tho interest rate t 8% and extend the due date three {oars from December $1, 3014. The prowsat valus of £t 10% Je three periods is 0.76 anc the prctent veiue of an ordinars Suunuly eT at 10% for three periods is 249 1, What ie the gain on estinguichmont for 20147 a 1,708,200 i200 = 2io00,000 & “Bs000 What is th interest expense for 20167 5 320.000,Problem 9-21 (IAA) Duc to adverse economic circumstances and ‘management, Tagaytay Highlands Company had ft reetrupturing of 2 9% P6000,000 not payable ta Bank due on January 1, 2014. There was no accrued i ‘on the note on January 1, 2014, "The bank reduced the principal obligation from PO, 42 P5,000,000 and extended the maturity to three fe December 81, 2016. However, the new interest rate ie payable annually every December 31, Considering Terms, the new effective rate le 8.89%. ‘The present value of 1 at 9% for three periods is 77 and prosont valve of an gedinary annuity of Lat Oe ft periods 253, 1. What is the present value of the new note payable January 1.20187 1. 6,000,000 1. 6,000,000 81498,500 4 §3850,000 2 What Jo the gain on extinguishment of debt to recognized for 20117 1,000,000 "350,000 508,500 3. What is the intorest expense for 2014 as a result of the Aebt restructuring? 8. 650,000, b. S34800 450,000 4, 647,000, 34s Problem 9-22 (AICPA Adapted) (On January 1, 2014, Granada Company had an overdue 10% pote payable to First Bank at P8,000,000 and accrued interest for £800,000, As a result ofa reatructuring agreement on Sanuary 1, 2014, First Bank agreed to the following Drovisione ‘The principal obligation is reduced to Po,000,000. ‘The accrued intorest of P800,000 Js forsiven ‘The date of maturity is extended to December 31, 2017 Annual interest of 12% is to be paid for 4 Years every December 31 ‘The present value uf 1 a 10% for 4 periods is 0.683 and the prevent valu ofan ordinary annuity of at 10% for 4 periods fait 1. What is the present value of the new note payable on Sapuary 120147 a. 6.380.400 5. 6.000.000 ©. 41088,000 5.464.000 2 What is the gain on extinguishment of debt to be rooognized for 20147 2,000,000 1 2s00.000. «2418.60 & 1610.60 2, What isthe intarest expense to be recognized for 20147 720,000 800,000 s3g040 page