CPA REVIEW SCHOOL FOF THE PHILIPPINES

Manila
FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/ESCALA/SANTOS/DELA CRUZ

NOTE PAYABLE AND DEBT RESTRUCTURE

1. On September 1, 2021, an entity borrowed on a P6,000,000 note payable from a bank. The note
bears interest at 12% and is payable in four equal annual principal payments of P1,500,000. On this
date, the bank’s prime rate was 10%. The first annual payment for interest and principal was made
on September 1, 2022.
1. On December 31, 2021, what amount should be reported as accrued interest payable?
a. 240,000
b. 180,000
c. 200,000
d. 150,000
2. What is the interest expense for 2022?
a. 480,000
b. 660,000
c. 540,000
d. 550,000
2. An entity frequently borrowed from the bank in order to maintain sufficient operating cash. The
following loans were at a 12% interest rate with interest payable at maturity. The entity repaid each
loan on scheduled maturity date.
Date loan Amount Maturity date Term of loan
November 1, 2020 500,000 October 31, 2021 1 year
February 1, 2021 1,500,000 July 31, 2021 6 months
May 1, 2021 3,000,000 January 31, 2022 9 months
The entity recorded interest expense when the loans are repaid. As a result, interest expense of
P150,000 was recorded in 2021. If no correction is made, by what amount would interest expense
be understated for 2021?
a. 380,000
b. 230,000
c. 240,000
d. 350,000
3. An entity transferred land to a creditor in a debt restructuring as asset swap.
Carrying amount of note payable liquidated 1,500,000
Carrying amount of land transferred 1,000,000
Fair value of land transferred 900,000

1. Under IFRS, what amount of gain on extinguishment of debt?

a. 300,000
b. 500,000
c. 200,000
d. 0
2. Under US GAAP, what is the gain on restructuring?
a. 600,000
b. 500,000
c. 100,000
d. 0
3. Under US GAAP, what amount should be reported as gain or loss on transfer of land?
a. 100,000 loss
b. 100,000 gain
c. 200,000 gain
d. 0
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4. An entity showed the following information at year-end:

Note payable 5,000,000
Accrued interest payable 500,000
The entity is threatened with a court suit if it could not pay the maturing debt. Accordingly, the
entity entered into an agreement with the creditor for the issuance of share capital in full settlement
of the note payable. The agreement provided for the issue of 50,000 ordinary shares with par value
of P50 and quoted price of P70. The fair value of the note payable is P4,000,000.
What is the gain from extinguishment of debt under the equity swap?
a. 2,000,000
b. 1,500,000
c. 3,000,000
d. 0

5. An entity had bonds payable with face amount of P5,000,000 and a carrying amount of P4,800,000.
In addition, unpaid interest on the bonds was accrued in the amount of P250,000.
The creditor had agreed to the settlement of the bonds payable in exchange for 50,000 shares of P50
par value. The shares have no reliable measure of fair value. However, the bonds are quoted at
P3,500,000.
What is the gain on the extinguishment of the bonds payable under the equity swap?
a. 1,500,000
b. 1,300,000
c. 1,550,000
d. 0

6. Due to extreme financial difficulties, an entity negotiated a restructuring of a 10%, P5,000,000 note
payable due on December 31, 2021. The unpaid interest on the note on such date is P500,000. The
creditor agreed to reduce the face amount to P4,000,000, forgive the unpaid interest, reduce the
interest rate to 8% and extend the due date three years from December 31, 2021. The present value
of 1 at 10% for three periods is 0.75 and the present value of an ordinary annuity of 1 at 10% for
three periods is 2.49.
1. Under IFRS, what is the gain on extinguishment for 2021?
a. 1,703,200
b. 1,203,200
c. 2,000,000
d. 540,000

2. What is the discount or premium on the new note payable on December 31, 2021?
a. 1,000,000 premium
b. 1,000,000 discount
c. 203,200 premium
d. 203,200 discount

3. What amount should be reported as interest expense for 2022?

a. 320,000
b. 379,680
c. 400,000
d. 303,680

4. What is the carrying amount of note payable on December 31, 2022?

a. 4,000,000
b. 5,000,000
c. 3,856,480
d. 3,737,120
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