DEBT RESTRUCTURING

Easy:

Average:

1. In a troubled debt restructuring in which the debt is continued with modified

terms, a gain should be recognized at the date of restructure, but no interest
expense should be recognized over the remaining life of the debt, whenever the

a. carrying amount of the pre-restructure debt is less than the total future cash
flows
b. carrying amount of the pre-restructure debt is greater than the total future
cash flows
c. present value of the pre-restructure debt is greater than the present value of
the future cash flows
d. present value of the pre-restructure debt is less than the present value of
the future cash flows

2. In a troubled debt restructuring in which the debt is continued with modified

terms and the carrying amount of the debt is less than the total future cash
flows,

a. no interest expense or revenue should be recognized in the future

b. a loss should be recognized by the debtor
c. a gain should be recognized by the debtor
d. a new effective-interest rate must be computed

3. In a troubled debt restructuring in which the debt is continued with modified

terms and the carrying amount of the debt is less than the total future cash
flows, the creditor should

a. compute a new effective-interest rate

b. not recognize a loss
c. calculate its loss using the current effective rate of the loan
d. calculate its loss using the historical effective rate of the loan

4. In a troubled debt restructuring in which the debt is settled by a transfer of

assets with a fair market value less than the carrying amount of the debt, the
debtor would recognize

a. a loss on the settlement

b. no gain or loss on the settlement
c. a gain on the settlement
d. none of these

5. A troubled debt restructuring will generally result in a

a. gain by the debtor and a loss by the creditor

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 b. gain by both the debtor and the creditor
c. loss by the debtor and a gain by the creditor
d. loss by both the debtor and the creditor.

Difficult:

Undefined:

6. Versatile Company after having experienced financial difficulties in 2015,

negotiated with a major creditor and arrived at an agreement to restructure a
note payable on December 31, 2015.

The creditor was owed a principal of P3,600,000 and interest of P400,000 but
agreed to accept equipment worth P700,000 and note receivable from a
Versatile Company’s customer with carrying amount of P2,700,000.

The equipment had an original cost of P900,000 and accumulated depreciation

of P300,000.

What amount should be recognized as a gain from debt extinguishment on

December 31, 2015?

a. 700,000
b. 600,000
c. 400,000
d. 0

7. Quest Company is threatened with bankruptcy due to its inability to meet

interest payments and fund requirements to retire P6,000,000 note payable
with accrued interest payable of P600,000.

The entity has entered into an agreement with the creditor to exchange equity
instruments for the liability.

The terms of the exchange are 300,000 ordinary shares with P5 par value and
P10 market value, and 25,000 preference shares with P10 par value and P60
market value.

What is the gain on the extinguishment of the note payable?

a. 2,100,000
b. 1,500,000
c. 2,750,000
d. 0

What is the total share premium from the issuance of the preference and
ordinary shares?

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 a. 2,750,000
b. 4,850,000
c. 1,500,000
d. 2,100,000

8. Sunset Company had bonds payable with face value 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?

a. 1,500,000
b. 1,300,000
c. 1,550,000
d. 0

What is the share premium from the issuance of the shares?

a. 2,300,000
b. 1,000,000
c. 1,500,000
d. 0

9. Due to extreme financial difficulties, Armada Company had negotiated a

restructuring of a 10% P5,000,000 note payable due on December 31, 2015.
The unpaid interest on the note on such date is P500,000.

The creditor had agreed to reduce the face value to P4,000,000, forgive the
unpaid interest, reduce the interest rate to 8% and extend the due date three
years from December 31, 2015.

What is the gain on extinguishment of debt in 2015 (use two-decimal places in

PV factor)?

a. 1,703,200
b. 1,203,200
c. 2,000,000
d. 540,000

What is the interest expense for 2017?

a. 385,648
b. 379,680
c. 400,000
d. 500,000

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 10.Due to adverse economic circumstances and poor management, Tagaytay
Highlands Company had negotiated a restructuring of its 9% P6,000,000 note
payable to Second Bank due on January 1, 2015. There is no accrued interest on
the note.

The bank has reduced the principal obligation from P6,000,000 to P5,000,000
and extend the maturity to 3 years or on December 31, 2017. However, the new
interest rate is 13% payable annually every December 31.

What is the gain on extinguishment of debt to be recognized for 2015?

a. 1,000,000
b. 350,000
c. 505,000
d. 0

11.On January 1, 2015, Mara Company entered into a debt restructuring

agreement with Clara Company which was experiencing financial difficulties.
Mara Company restructured a P1,000,000 note receivable as follows:

 Reduced the principal obligation by P300,000

 Forgave P120,000 of accrued interest
 Extended the maturity date from January 1, 2015 to December 31, 2016.
 Reduced the interest rate from 12% to 8%. Interest is payable annually
on December 31, 2015 and 2016.

Relevant present value factors:

Single sum, two years at 8% .857

Single sum, two years at 12% .797
Ordinary annuity, two years at 8% 1.783
Ordinary annuity, two years at 12% 1.690

What is the impairment loss on the note receivable for 2015?

a. 347,460
b. 467,460
c. 442,100
d. 562,100

What is the interest income for 2015?

a. 56,000
b. 78,305
c. 81,155
d. 80,000

12.In a debt restructuring, that is considered as asset swap, the gain on

extinguishment is equal to the

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 a. Excess of the fair value of the asset over its carrying amount
b. Excess of the carrying amount of the debt over the fair value of the asset
c. Excess of the fair value of the asset over the carrying amount of the debt
d. Excess of the carrying amount of the debt over the carrying amount of the
asset

13.For a debt restructuring involving substantial modification of terms, it is

appropriate for a debtor to recognize a gain when the carrying amount of the
debt

a. Exceeds the total future cash payments specified by the new terms
b. Is less than the total future cash payments specified by the new terms
c. Exceeds the present value of the future cash payments specified by the new
terms
d. Is less than the present value of the future cash payments specified by the
new terms

14.For a debt restructuring involving a substantial modification of terms, which of

the following specified by the new terms would be compared to the carrying
amount of the debt to determine if the debtor should report a gain on
extinguishment?

a. The total future cash payments

b. The present value of the new debt at the original interest rate
c. The present value of the new debt at the modified interest rate
d. The amount of future cash payments

15.There is substantial modification of terms of an old financial liability if the gain

or loss on extinguishment is

a. At least 10% of the carrying amount of the old liability

b. Less than 10% of the carrying amount of the old liability
c. At least 10% of the new liability
d. Less than 10% of the new liability

16.An entity shall initially measure equity instruments issued to extinguish all or
part of a financial liability at

a. Fair value of the equity instruments issued

b. Fair value of the liability extinguished
c. Par value of the equity instruments issued
d. Carrying amount of the liability extinguished

17.If the fair value of the equity instruments issued cannot be reliably measured,
the equity instruments issued to extinguish a financial liability shall be
measured at

a. Fair value of the liability extinguished

b. Par value of the equity instruments issued
c. Carrying amount of the liability extinguished

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 d. Book value of the equity instruments issued

18.If both the fair value of the equity instruments issued and the fair value of the
financial liability extinguished cannot be measured reliably, the equity
instruments issued shall be measured at

a. Carrying amount of the liability extinguished

b. Par value of equity instruments issued
c. Book value of the equity instruments issued
d. Value assigned by the Board of Directors

19.The gain or loss from extinguishment of a financial liability by issuing equity

instruments is presented as

a. Other income or other expense

b. Separate line item in profit or loss
c. Component of other comprehensive income
d. Component of finance cost

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