Exercise: Refinancing

Friday, September 16, 2022 2:46 PM

Link: Liabilities (Presentation, Refinancing, Breach of Covenant)

Illustrative Problem 1: On May 1, 2020, Pepper Company issued a

P900,000, 12-month promissory note to Rain Co. in exchange for an
equipment. Reporting date is on December 31, 2020 while the date
the financial statements are authorized for issue is on March 31, 2020.

*March 31, 2020 - date of issuance; irrelevant as to classification of

liability. Relevant only as to disclosure.
*May 1, 2020 - maturity date; four months after reporting date
General rule: Current liability

Required: What is the proper classification (current or noncurrent)

under the following situations:
1. Pepper has the discretion to refinance or roll over the note for
another year.
- Non-current liability kasi may discretion
2. On March 1, 2021 before the 2020 financial statements were
issued, the note payable was replaced by an 18-month note for
the same amount.
- Nagkaroon ng refinancing agreement kaso nangyari nung
March 1, 2021
- Ang usapan para maging non-current, para pumasok sa
exception, dapat pumasok before the reporting date,
December 31, 2020
- Current
3. Pepper intends to pay the obligation on April 30, 2021 and
borrows again on the same date for the same amount. The
new note will be due 2 years from May 1, 2020.
- Binayaran naman on April 30, 2021
- After the reporting date naman umutang ulit
- Current
4. On February 1, 2021, the entire note was refinanced through
an issuance of a long-term obligation
- After the reporting date nagrefinance
 long-term obligation
- After the reporting date nagrefinance
- Current
5. On November 30, 2020, Pepper entered into an agreement with Rain to
refinance the obligation for 8 months from May 1, 2021. The new maturity
date will be on December 31, 2021.
- Pasok ang refinancing agreement before reporting date
- One year parin from the reporting date yung maturity date; so kahit
nangyari yung refinancing agreement before the reporting date current
parin kasi hindi on a long-term basis yung refinancing agreement
6. On December 31, 2020, Pepper entered into an agreement with Rain to
refinance the obligation for another 12 months from May 1, 2021.
- Pasok sa unang requirement na on or before the reporting date, nangyari
yung requirement
- Pasok din sa requirement na dapat on a long-term basis irefinance which
is mangyayari from May 1, 2021 which means ang new maturity date ay
April 31, 2022 and beyond one year non-current

Illustrative Problem 2: On May 1, 2020, Pepper company issued P900,000, 2-year

promissory note to Rain Co. in exchange for an equipment. Reporting date is on
December 31, 2020 while the date the financial statements are authorized for issue is
on March 31, 2021.

*Maturity date - April 20, 2022

Required: What is the proper classification (current or noncurrent) under the

following situations:
1. Pepper intends to settle the note on the maturity date.
- General rule
- Non-current
2. On April 30, 2021, Pepper entered into an agreement with Rain to refinance
the obligation for another 2 years from the date of maturity.
- General rule
- Non-current
3. On March 1, 2021, Pepper breaches a covenant related to the obligation and
the loan becomes payable on demand. On the same date, Rain agreed to give
Pepper a grace period of 1 year from the date of breach.
- Nangyari yung breach sa March 1, 2021 which is after ng reporting date;
wapakels tayo kasi dapat nangyari yung breach of covenant during the
reporting date
- Non-current parin
4. On November 1, 2020, Pepper breaches a covenant related to the obligation
and the loan becomes payable on demand. On the same date, Rain agreed to
give Pepper a grace period of 1 year from the date of breach.
 reporting date
- Non-current parin
4. On November 1, 2020, Pepper breaches a covenant related to the obligation
and the loan becomes payable on demand. On the same date, Rain agreed to
give Pepper a grace period of 1 year from the date of breach.
- Nangyari ang breach within the reporting date
- New maturity date is October 31, 2021 (November 1, 2021 daw sabi ni Sir
sa vid??) which is NOT beyond 12 months from the reporting date,
December 31, 2020
- Exception to the general rule
- Current
5. On October 1, 2020, Pepper breaches a covenant related to the obligation and
the loan becomes payable on demand. On the same date, Rain agreed to give
pepper a grace period of 1 year after the reporting date.
- Nangyari within the year yung breach
- One year lang yung grace period na binigay
- Exception to the general rule
- Current
6. On September 1, 2020, Pepper breaches a covenant related to the obligation
and the loan becomes payable on demand. On the same date, Rain agreed to
waive the breach and give Pepper a second chance.
- Exception to the exception to the general rule
- Current