CHAPTER 9 | DEBT RESTRUCTURE TECHNICAL KN OWLEDGE To understand the nature and purpose of debt restructuring. To identify the types of debt restructuring. To know the accounting for an asset swap, equity swap and modification of terms of the old liability. 282DEBT RESTRUCTURING Debt restructuring j, ituaii he ditor, for 5 1 is a situation where the creditor, f economic or legal reasons related to the debtor's financial difficulties, grants to the debtor concession that would not otherwise be granted in a normal business relationship. The concession either stems from an agreement between the creditor and debtor, or is imposed by law or a court. The objective of the creditor in a debt restructuring is to make the best of a bad situation or maximize recovery of investment. The three types of debt restructuring are asset swap, equity swap and modificaton of terms of the old liability. Asset Swap An asset swap is the transfer by the debtor to the creditor of any asset, such as real estate, inventory, accounts receivable and investment in full payment of an obligation. Under PFRS 9, paragraph 3.3.1, asset swap is treated as a derecognition of a financial liability or extinguishment of an obligation. Paragraph 3.3.3 provides that the difference between the carrying amount of the financial liability and the consideration given shall be recognized in profit or loss. ‘An entity provided the following balances at year-end: 2,000,000 Note payable corte 400,000 Accrued interest payable At year-end, the entity transferred to the creditor land with carrying amount of P1,500,000 and fair value of P2,200,000. Note payable 2,000,000 Accrued interest payable 400,000 Total liability 2,400,000 Carrying amount of land (1,500,000) Gain on extinguishment of debt 900,000 Note payable 2,000,000 Accrued interest payable 400,000 Land ; 1,500,000 Gain on extinguishment of debt 900,000 283USA GAAP on asset swap Under USA GAAP, asset swap,is recorded a8 if two transactions have taken place, namely the sale ai I ae and the extinguishment of the liability. Accordingly, two gains or losses are recognized. e asset and the The difference between the fair value of th 70 on exchange carrying amount of the asset is the gain or loi ount of the liability The difference between the carrying am Tea itae i in or and the fair value of the asset is 8a” restructuring. 2,200,000 Fair value of land ‘ 1,500,000 Carrying amount of land Sota Gain on exchange => 2,000,000 Note payable 400,000 Accrued interest payable Sri00 000 Total liability 2,200,000 Fair value of land Gain on debt restructuring Journal entry Note payable 2 Accrued interest payable : 1,500,000 Land 700,000 Gain on exchange 200,000 Gain on debt restructuring : S incl Note that the gain on extinguishment under eee both the gain on exchange and gain on debt re C4 under USA GAAP. IFRS shall be followed as this is in conformity with international accounting standard 284Dacion en pago accounting Dacion en pago arises ty is offered Z when a mortgaged property ts by the debtor in full settlement of the debt. The transaction shall be accounted for as an asset swap form of debt restructuring. Dacion en pago requires recognition of gain or loss based on the balance of the obligation including acerued interest and other charges. If the balance of the obligation including accrued interest and other charges is more than the carrying amount of the property mortgaged, the difference is a gain on extinguishment of debt. Otherwise, if the balance of the obligation is Jess than the carrying amount of property mortgaged, the difference is a loss on extinguishment. Illustration Land costing P500,000 and building costing P4,000,000 vie accumulated depreciation of P800,000, were mortgaged to secure a bank loan of P3,000,000. Face amount of the loan eo d inte yabli “50, Accrued interest payable 50,000. Bank service charges Subsequently, the land and building were given to the bank in full payment of the liability. Journal entry Mortgage payable 3,000,000 Accrued interest payable 200,000 Bank service charges 50,000 Loss on extinguishment of debt 450,000 Accumulated depreciation 800,000 Land 500,000 Building 4,000,000 Total liability 3,250,000 Carrying amount of land and building (500,000 + 3,200,000) (3,700,000) Loss on extinguishment of debt (_ 450,000) 285Equity swap reditor An equity swap is q transaction whereby a debtor ie reali may renegotiate the terms of q financial liability d by the debtor that the liability is fully or partially extinguished by 1 issuing equity instruments to the creditor. Simply stated, by the debtor obligation. re capital » AN equity swap is the soars Oren of an to the creditor in full or partial P Accounting issue ity instruments How should an entity initially measure the equity ¥ is ‘fh a financial liability? issued to extinguis, inguish to extinguis! Under IFRIC 19, the equity instruments ae oe vollowing a financial liability shall be measure amounts in the order of priority: . oe is d a. Fair value of equity instruments issue b. Fair value of liability extinguished ad c. Carrying amount of liability extinguis : : he financial The difference between the carrying amount of t neveqity liability and the initial measurement of t l d . ain or loss on instruments issued shall be recognized as & extinguishment, jal liability by The gain or loss on extinguishment of a Daa te line issuing equity shares shall be reported as utem in the income statement. Illustration . -end: An entity showed the following data at year-en' . 5,000,0 Bonds payable 500,000 Accrued interest payable ‘ lue of The entity issued share capital with a aa Dene ot P2,000,000 and fair value of P4,500,000 in fu tie the bonds payable and accrued interest payable. On the other hand, the fair value of the bonds payable is P4,700,000. 286Fair value of sha res issued is used Bonds payable . A 5,000,000 Accrued interest payabj, "600,000 Share capital *Y*ble 2,000,000 are premium 2,500,000 Gain on extinguishment of debt 1,000,000 Fair value of shares j 4,500,000 Par value of shares sted 2,000,000 Share premium 2,500,000 Bonds payable 5,000,000 Accrued interest payable 500,000 Carrying amount of b ble 5,500,000 Fair value of shares iseced yee 4,500,000 Gain on extinguishment of debt 1,000,000, Fair value of bonds payable is used Bonds payable 5,000,000 Accrued interest payable 500,000 Share capital , 2,000,000 Share premium 2,700,000 Gain on extinguishment of debt 800,000 Fair value of bonds payable 4,700,000 Par value of shares issued 2,000,000 Share premium 2,700,000 Carrying amount of bonds payable 5,500,000 Fair value of bonds payable 4,700,000 Gain on extinguishment of debt _ 800,000 Carrying amount of bonds payable is used Bonds payable 5,000,000 Accrued interest payable 500,000 Share capital 2,000,000 Share premium 3,500,000 Carrying amount of bonds payable 5,500,000 Par value of shares issued 2,000,000 Share premium 3,500,000 If the carrying amount of the liability is used, there is no gain or loss on extinguishment. 287wT. | = — Modification of terms Modification may involve either the interest, maturity value or both. Interest concession may involve a reduction of intense rate, forgiveness of unpaid interest or a moratorium on interest, Maturity value concession may involve an extension of the maturity date or a reduction of the principal amount. PFRS 9, paragraph 3.3.2, provides that a substantial modification of terms of an existing financial liability shall be accounted for as an extinguishment of the old financial liability and the recognition of a new financial liability, Under Application Guidance B3.3.6 of PFRS 9, there is substantial modification of terms if the gain or loss on modification is at least 10% of the old financial liability. The gain or loss on modification is the difference between carrying amount of the old liability and the present value of the new liability, including any fees paid, discounted at the original effective interest rate. The new liability is discounted’ using the original effective rate only for purposes of determining whether the gain or loss on modification satisfies the 10% test. If the old liability is determined to be substantially modified, the new liability shail be measured at fair value or present value using the prevailing market rate of interest. The difference between the carrying amount of the old liability and the fair value or present value of the new liability at market rate of interest shall be accounted for as gain or loss on extinguishment, Any costs or fees incurred because of the substantial modification of terms shall be recognized as part of the gain or loss on extinguishment, In other words, any costs or fees incurred because of the substantial modification of terms shall be deducted from any gain on extinguishment or added to the loss on extinguishment of the old financial liability 288Substantial Modification On January 1, 2029, an entity showed the following: Note payable ~ due g; -14% 5,000,000 Accrued interest payabie ere 700,000 The entity is prs ditor the followin, granted by the credt g concessions on January 1, 9022: a. The accrued intere 00,000 is forgiven b. The principal obligation ig reduced to P4,000,000. c. The new interest rate is 10% payable every December 31. d. The new date of maturity is December 31, 2025. e. The market rate of interest is 12% for similar liability. £ The entity paid P150,000 to the creditor as arrangement fee for the restructuring. Initially, this requires computation of the present value of the new note payable using the 14% original effective rate in applying the "10% test" of determining substantial modification of terms. The present value of 1 at 14% for 4 periods is 0.592 and the present value of an ordinary annuity of 1 at 14% for 4-periods is 2.914. PV of principal (4,000,000 x .592 2,368,000 PV of interest payments (400,000 x 2.914) 1,165,600 Present value of new note payable 3,583,600 New annual interest payment (10% x 4,000,000) 400,000 Note payable ~old 5,000,000 Accrued interest payable 700,000 Carrying amount of old liability 5,700,000 Present value of new note payable at 14% 3,533,600 Gain on modification 2,166,400 Arrangement fee (150,000) Net gain on modification 2,016,400 Quite obviously, the net gain on modification of P2,016,400 is very much more than 10% of the carrying amount of the old note payable of P5,700,000. Accordingly, there is a substantial modification of terms accounted for as extinguishment of the old note payable and recognition of the new note payable. 289Fair value of new note payable Since there is substantial modification of terms, the new note payable shall be measured at fair value. The fair value ig equal to the present value of the new note payable using the market rate of 12%, ‘The Present value of 1 at 12% for 4 periods is 0.636 and the present value of an ordinary annuity of 1 at 12% for 4 periods is 3.037. PV of principal (4,000,000 x .636 2,544,000 PV of interest payments (400 600 x 3.087) ue Present value of 3,758,800 Principal amount "°*® Pavable 4,000,000 Discount on new note payable 241,200 The difference between the ing amount of the old liability and the present value of the searnate payable at the market rate of 12% is recognized as gain or loss on extinguishment of a financial liability. Note payable —old 5,000,000 Accrued interest payable 700,000 Carrying amount of old liabilit 5,700,000 Present value of new note payable based on 12% 3,758,800 Gain on extinguishment 1,941,200 Arrangement fee (150,000) Net gain on extinguishment 1,791,200 - Journal entries 1. To record the extinguishment of the old note payable: Note payable - old 5,000,000 Accrued interest payable 700,000 Discount on new note payable 241,200 Note payable — new 4,000,000 Gain on extinguishment of debt 1,791,200 Cash (arrangement fee) 150,000 2. To record the interest payment on the new note payable for 2022: Inte Y 400,000 nt ache hae has (10% x 4,000,000) 400,000 8. To amortize the discount on new note payable for 2022: Interest expense 51,056 Discount on new note payable 51,056 290Table of amortization of discount Date Interest Interest Discount aid amortization 1/1/2022 © ae 12/31/2022 400,000 451,056 51,056 12/31/2023 400,000 457,183 57,183 12/31/2024 400,000 464,045 64,045 12/31/2025 400,000 468,916 68,916 December 31, 2022 Interest paid (10% x 4,000,000) Interestexpense (12% x 3,758,800) Discount amortization Carrying amount — January 1, 2022 Carrying amount —December 31, 2022 December 31, 2023 Interest paid Interest expense (12% x 3,809,856) Discount amortization Carrying amount — December 31, 2022 Carrying amount — December 31, 2023 December 31, 2024 Interest paid Interest expense (12% x 3,867,039) Discount amortization Carrying amount — December 31, 2023 Carrying amount - December 31, 2024 December 31, 2025 Interest paid Interest expense (rounded) Discount amortization Carrying amount - December 31, 2024 Carrying amount - December 31, 2025 291 Carrying amount 3,758,800 3,809,856 3,867,039 3,931,084 4,000,000 400,000 451,056 51,056 3,758,800 = AS,500 3,809,856 ss 400,000 457,183 57,183 3,809,856 400,000 464,045 — 64,045 3,867,039 3,931,084 400,000 468,916 68,916 3,931,084 4,000,000wean wea YN an No substantial modification a p6,000,009 An entity had negotiated a restructuring ye ie no ‘accrue te payable on December 31, 2022, Tht the principal interest < n_the note.The creditor has 600 and extended the Obligation fom PO.000,000 to P5,000 0 maturity to 3 years on December _ 2% payable annual However, the now interest rate 1s 100 booty the creditor every December 31. The entity paid P1200 10 is 906 after as an arrangement fee, The new elle considering the arrangement fee. jsis0.79. and the present 9% for three periods 18 74" ‘eg 1 Talus ofan ote oF at 8% 896 for three periods is 3,950,000 t ‘ a Bai : Pye ne APoxiams269 BBG Present value of new note payable 6,000,000 Seo CORe UPAR pusedonss SAG Gain on modification (220,000) \ Arrangement fee 382,000 q Net gain or modification n 10% of the carrying The net gain of P3g2,000 is less tha 0. Thus, there is no | amount of old liability of P6,000,00 substantial modification of terms. IASB clarified that | In accordance with Paragraph BO.4.6, he recognized even if the ain or loss on modification shall be re there is no substantial modification of te of P502,000 is However, only the gain on modifica re idification cost of recorded. The arrangement fee or any modihccetn, Spo oF P120,000 is included in the measuremen 5,498,000 | Present value of new note payable (120,000) Arrangement fee ‘5,378,000 Adjusted present value of new note payable 5,000,000 Face amount of new note payable 378,000 Premium on note payable ored if there is no The prevaling market rate of interest is ignore a ity no substantial modification of terms because simply continued. . : th A new effective rate must be computed ane fee is included in the measurement of the n ie arrangement liability. 292Journal entries 1, To record the modified liability on December 31, 2022: Note payable 1,000,000 ‘remium on note payabl 378,000 Gainon modification” 502,000 Cash (arrangement fee) 120,000 Note that the gain on modification is recognized ag mandated by IASB, 2. To record the annual interest payment for 2023: Interest expense (5,000,000 x 12%) 600,000 Cash 600,000 3. To amortize the premium on note payable for 2023: Premium on note payable 115,980 Interest expense 115,980 Date Interest Interest , Premium Carrying paid expense amortization amount 12/31/2022 5,378,000 12/31/2023 600,000 484,020 115,980 5,262,020 12/31/2024 600,000 473,582 126,418 5,135,602 12/31/2025 600,000 464,398 135,602 5,000,000 Interest paid equals face amount times modified stated rate of 12%. Thus, for 2023, P5,000,000 x 12% equals P600,000. Interest expense equals carrying amount times new effective rate of 9% after considering arrangement fee. Thus, for 2023, P5,378,000 x 9% equals P484,020 and so on. Since cost is incurred as a result of the modification, the original effective rate of 8% is modified. In other words, there is need to determine a new effective rate. After considering the arrangement fee of P120,000, the new effective rate is 9% to equal the adjusted present value of P5,378,000. Premium amortization equals interest paid minus interest expense. Thus, for 2023, P600,000 minus P484,020 equals P115,980, and so on. 2932 QUESTIONS 1. Explain a debt restructuring. fea eturi 2. What are the threo types of debt restru 3. Explain briefly an asset swap. : Explain dacion en pago. 4 dacion en pago, 5. Explain the accounting procedure dor 6 : Explain briefly an equity swap. a of the equity ‘Explain the initial measurement instruments issued in an equity 2 ‘ ' 8. Explain briefly modification of term aad ‘ odification o Explain the accounting for substantial m f terms. ial modification 10. Explain the accounting for nonsubstantia of terms, 294PROBLEMS Problem 9-1 (ACP) aout Company is in financial trouble and could not oe Pe On, installments and interest on its bank loan o P5,000,000. The i ton the loan to date is P1,000,000, accrued interes The entity and the bank agreed on a “dacion en pago” arrangement. Thus, the mortgaged land and building were given by the entity as full payment for the loan including accrued interest, The cost of the land is P1,500,000 and the building, P6,000,000 with accumulated depreciation of P1,800,000. The fair value of the land and building is reliably determined at P5,900,000. Required: 1. Compute the gain or loss on extinguishment of debt. 2. Prepare journal entry to record the dacion en pago. Problem 9-2 (ACP) Rainbow Company showed the following data with respect to a matured obligation: Note payable 1,000,000 Accrued interest payable 200,000 The entity was in financial distress and negotiated with the creditor for the settlement of the note payable. Consequently, the entity transferred a patent to the creditor in full satisfaction of the note payable. ‘The patent had a carrying amount of P600,000 and a fair value of P1,100,000. Required: Prepare journal entry to record the asset swap on the books of Rainbow Company. 1. Under IFRS 2. Under USA GAAP 295o! fi bi a) wp! é! a! Problem 9-3 (IAA) ith face amount of Sundown Company had bonds Payee 160,000, P5,000,000 and a carrying amount of PS, ‘ n aceru In addition, unpaid interest on the bonds hadieee e in the amount of P300,000. he bonds payable The ereditor agreed to the settlement of the bonny vable in exchange for land with fair value ¢ historical cost of P3,200,000. Required: books of Sundown Prepare journal entry necessary ona bonds payable. Company to record the settlement 0! Problem 9-4 (IAA) 00 note payable to Star Company had outstanding a PEO OO able on the note an investment entity, Accrued interest P amounted to P600,000. ; ity negotiated with Because of financial difficulties, the at efmachine parte the investment entity to exchange inven! to satisfy the debt. P3,600,000 with The inventory transferred was cavtied of P00) inventory estimated fair value of P5,600,000. The P system was used. Required: books of Star Prepare journal entry necessary on ie payable Company to record the settlement of tProblem 9-5 (IAA) Sunshine Company showed the following data with respect to a matured obligation: Mortgage payable 5,000,000 Accrued interest payable 500,000 The entity was threatened with a court suit if it could not pay its maturing debt. Accordingly, the entity entered into an agreement with the creditor for the issuance of share capital in full settlement of the mortgage payable. The agreement provided for the issue of 35,000 shares with par value of P100 and current quoted price at P130. The fair value of the liability was P4,700,000. Required: Prepare journal entry to record the equity swap: 1. If the fair value of the share capital is used. 2. Ifthe fair value of the liability is used for the equity swap. 3. If the carrying amount of the liability is used. Problem 9-6 (IAA) Quest Company was threatened with bankruptcy due to the inability to meet interest payments and fund requirements to retire P5,000,000 note payable with accrued interest payable of P400,000. The entity entered into an agreement with the creditor to exchange equity instruments for the financial liability. The terms of the exchange were 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. The fair value of the liability was P4,800,000 Required: Prepare journal entry to record the equity swap. 1. If the fair value of the equity instruments is used. 2. If the fair value of the liability is used. 3. If the carrying amount of the liability is used. 297i W Problem 9-7 (IAA) i jount, Sunset Company had bonds payable en ri ae on P5,000,000 and a carrying amount of P4,800, din th In addition, unpaid interest on the bonds was accrue - amount of P250,000. b) The creditor agreed to the settlement of thet bond payable in exchange for 50,000 shares of P50 par value. 0. 7 The shares had a current market value oe he fair value of the bonds payable was P4,600,000. Required: ‘ é ti Prepare journal entry ‘on the books of Sunset Company to record the settlement of the bonds payable: 1. If the fair value of the equity Snstrumente is used. 2. If the fair value of the bonds is used. eae 3. If the carrying amount of the financial liability is used. Problem 9-8 (IAA) Baguio Company was experiencing financial difficulty and Was renegotiating debt restructuring with the creditor to relieve its financial stress. The entity had a P5,000,000 note payable to First Bank. The bank was considering two alternatives. 1. Acceptance of land owned by the entity cee P4,000,000 and carried at historical cost of P2,800,000. 2. Acceptance of an equity interest in the entity me os of 40,000 shares with fair value of P120 per share an par value of P100 per share. Required: Prepare journal entry that Baguio Company would make under each alternative. 298Problem 9-9 (FRS) Due to extreme fj i ifficulties, Red Compan: negotiated a restructugmect iS Bs ‘00,000 note payable due on January 1, 2022.°The accrued interest on the note payable on such date was P600,000. The creditor agreed to forgive the accrued interest, reduce the interest rate to 8% and extend the due date five years from January 1, 2022. The market rate of interest for similar liability is 10%. On January 1, 2022, the entity paid P100,000 to the creditor as an. arrangement fee. PV of 1 at 12% for 5 peri 0.57 PV ofan ordinary amu t oe Lat 12% for 5 periods 3.60 PV of Lat 10% for 5 periods : 0.62 PV of an ordinary annuity of 1 at 10% for 5 periods 3.79 Required: 1. Determine whether there is a substantial modification of terms. aac 2. Determine the fair value of the new liability based on the 10% market interest rate. bl 3. Determine the discount on the new note payable. 4. Determine the gain or loss on extinguishment. 5. Prepare journal entries for 2022. Problem 9-10 (IAA) White Company was indebted to the bank for P6,000,000 on January 1, 2022. The principal and accrued interest of P600,000 were overdue. The interest on the note was 10%. The entity negotiated with the bank for the restructuring of the obligation. The principal obligation is not reduced. The accrued interest of P600,000 is waived. The'new date of maturity is December 81, 2023. The entity shall pay an annual interest of 12% every December 31. The present value of 1 at 10% for two periods is 0.83 and the present value of an ordinary annuity of 1 at 10% for two periods is 1.74. The market rate of interest is 9%. The PV of 1 at 9% for two periods is 0.84 and the PV of an ordinary annuity of 1 at 9% for two periods is 1.76. Be op Required: Prepare journal entries for 2022. 299Problem 9-11 (AICPA Adapted) Hull Company js i to Apex Company under 5,000,000, 1236, th eee tte dated December 31, 2024 with accrued interest of PG00,000 on December 31, 2022, On December 31, 2022, Apex Company agreed to settle the note’ and acertied interost for a tract of land with fair valyg of P4,500,000 and acquisition cost of P3,600,000. What amount of gain on extinguishment should Hujj Company report for 2022? a. 2,000,000 b. 1,400,000 ce. 1,100,000 d. 900,000 Problem 9-12 (AICPA Adapted) Knob Company transferred real estate to Mene Company in ful liquidation of Knob Company's liability to Mene Company: Carrying amount of liability liquidated 1,500,000 Carrying amount of real estate transferred 1,000,000 Fair value of real estate transferred 1,200,000 What amount of gain on extinguishment should be recognized by Knob Company? a.» 300,000 b. 500,000 c. 200,000 a 0 Problem 9-13 (AICPA Adapted) During 2022, Mann Company experienced financial difficulties and is likely to default on a P5,000,000, 15% three-year note dated January 1, 2020 payable to Summit Bank. On December 31, 2022, the bank agreed to settle the note and unpaid interest of P750,000 for P4, 100,000 cash payable on January 31, 2023. What amount should be reported as gain from extinguishment of debt in the 2022 income statement? a. 1,650,000 b. 2,400,000 C 750,000 d. 900,000 300Problem 9-14 (AICPA Adapted) On January 1, 2022, Sunris Company was experiencing extreme financial pressure mal was in default in meeting interest payment on a long term note of P6,000,000 due on December 31, 2022. The interest rate is 12% ble every December 31. The accrued interest payable on January 1, 2022 is P720,000. In an agreement with the creditor, the entity obtained the following changes in the terms of note: a. The accrued interest on January 1, 2022 is forgiven. b. The principal is reduced by P500,600. c. The new interest rate is 8% payable every December 31. d. The new date of maturity is December 31, 2025. e. The prevailing market rate of interest is 10%. The present value of 1 at 12% for four periods is 0.64 and the present value of an ordinary annuity of 1 at 12% for four periods is 3.04, The PV of 1 at 10% for 4 periods is 0.68 and the PV of an ordinary annuity of 1 at 10% for 4 periods is 3.17. 1. What amount should be recognized as gain on extinguishment for 2022? : a. 1,585,200 b. 1,862,400 c. 1,220,000 d. 1,500,000 2 a. b. c. wo What amount should be reported as interest expense for 022? 440,000 513,480 720,000 d. 550,000 3. What is the carrying amount of the note payable on December 31, 2022? a. 5,500,000 b. 5,061,320 c. 5,208,280 d. 5,000,512 4. Prepare journal entries for 2022. 301" " Problem @15 (ATCPA Adapted) Ja Company f Due to eXtreme {nano soutien ARN mote, vaya a NOLAN , dea ie ora wa " " ye unpaid Woterael On he nut en atoll ate wan DAO, 000. 4, BOK ihe evedtitor agrond to peduoe the Mee, noun Ua Wate hea EVE Che vnpaid (ntereat, redivoe ue Honemiber th, wong! and onto thou dhite (hire year (01 : peditor Armada Company paid 00,000 to the are tn APPANROMONT the. 5 7 WO78 y ‘The present value ‘of Eat 10% for thyee er nN for thre the prevent Valo ofan ordinary anniity perioda ia gdp, : 2% for wimilay The prevailing market rate of interent ree the ny note. The PV OE Tat Tse find parody in iw dd. an ordinary anonity at bat hide tor dy , f } What amount ahould be reported an Bain on extimtiahment for g0g8? a 1288,000 b.1.028;000 & 141,000 a Lad ooo 9 S What ia the diacount or on December st, 2oL2? promium or the new note payable & 228,600 premium b. 228,600 discount © 441,000 premium a, 441000 discount intorest expense for A. What amount should be reported ax interest expe 7 O23? a. 860,000 b. 487,080 © 427,140 a. 540,000, 4. What is the carrying amount of the note payable on. December 81, 2025? 8. 4,500,000 3,981,920 c. 4,186,080 4,338,540 5. Prepare journal entries for 2022 and 2023. 302Problem 9-16 (AICPA Adapted) On January 1, 2099, Granada Company had pc ie pedal note payable to Firat Bank nt P#,000,000 and antares payable of P800,000, As a result of 4 restructuring agreement on January 1, 2022, First Bank agreed to the following provisions: The principal obligation ie reduced to P6,000,000, The accrued interest of P800,000 is forgiven. + The date of maturity ia extended to December 31, 2025, * Annual interest of 12% is to be paid for 4 years every December 31, The present value of 1 at 10% for 4 periods ie 0.68 and the present value of an ordinary annuity of 1 at 10% for 4 periods is 3.17. ‘The market rate of interest for similar note is 9%. The PY of 1 at 9% for 4 periods is .71 and the PV of an ordinary annuity of 1 at 9% for 4 periods ia 3.24. 1. What amount should be reported as present value of the new note payable on January 1, 2022? a. 6,592,800 b. 6,000,000 c. 6,362,400 d. 4,260,000 2. What amount should be reported as gain on extinguishment of debt for 2022? a. 2,000,000 b. 2,800,000 ce. 2,207,200 d. 2,437,600 3. What amount should be reported as interest expense for 2022? a. 720,000 b. 659,280 c. 636,240 d. 593,352 4. Prepare journal entries for 2022. 303Problem 9-17 (IFRS) overdue 10% On January 1, 2022, fiverlast Company had tn QversTy 10% note payable at P6,000,000 and acorue ‘cement on January P600,000, As a result of a restructuring agre ‘concessions, 1, 2022, the creditor agreed to the following . i iven. Accrued interest of PG00,000 is forgiv ‘he new principal is P4,000,000. ble every December 31, The new interest rate is 6% payable December 31, 2024 e new maturiy date of the note is ment fee to the The entity paid P350,000 as an arrange! creditor, Saooe the PV of an Sry dat, 10% for 3 periods is 0,75 and th ordinary annuity of 1 at 10% for 3 perio is 14%. The PV The market rate of interest for similar ney of an ‘ordinary of 1 at 14% for 8 periods is 0.67 and i annuity of 1 at 14% for 3 periods is 2.32. be initially 1. At what amount should the new note payable measured? a. 3,597,600 b. 3,947,600 ¢. 3,236,800 a. 4,000,000 ry : hould be What amount of gain on extinguishment s recognized for 20299 a. 3,363,200 3,013,200 ¢. 2,652,400 d. 3,002,400 ‘ nse for 3. What amount should be reported as interest expe! the 20227 a. 453,152 b. 394,760 c. 359,760 d. 240,000 ; able on 4. What is the carrying amount of the new note pay ; December 31, 2029? a. 3,449,952 b. 4,000,000 ¢. 3,786,848 d. 3,689,952Problem 9-18 (IFRS) On January 1, 2022, Kingdom Company had an overdue 10% note payable of P5,000,000 and accrued interest payable of P500,000. The entity is granted by the creditor in a debt restructuring agreement the following concessions: a. Accrued interest of P500,000 is forgiven. b. The new interest rate is 14% payable annually every December 31. = c. The new maturity date of the note is December 31, 2025. a. The entity paid P290,000 to the creditor as arrangement fee or modification cost. : iS Z e. Considering the effect of the modification cost or arrangement fee, the new effective interest rate is 12%. £ The market rate of interest for similar note is 9%. 9% 10% 12% PV of 1 for 4 periods 0.71 0.68 0.64 PV ofanordinary annuity of 1fordperiods 3.24 317 3.04 1. What amount of loss on modification should be recognized for 2022? a. 409,000 b. 119,000 ce. 291,000 d. 0 2. What amount should be reported’ as interest expense for 2022? a. 700,000 b. 632,900 c. 561,900 d. 639,480 3. What is the carrying amount of the modified note payable on December 31, 2022? 4. Prepare journal entries for 2022. 305Problem 9-19 Multiple chotee (ERS) D pent is V1) an aaaet evap, the gant on edingiiahn ane Ket 8. Excess of thir value of nant over Ata wat ty tne Aone bo Bycese of carrying amount of the value of the asact i avoy tlie ohteyin ©. Bxceas of the fair value of the daaet over tl ty Amount of (he debt the de do Excers of the canning anvount of vartyin y of the aaae! aut post involving substantial riate for ad eb LON (a. vin of the debe sified hy Ht over the For a debt yeatructuring iy modification of (evina, it 1a Approp tat recognize a gain when (he carrying & ° \ onta Apec a. Exceeds the total fiture cash pay mer & the new terme vente apedified bo Te leas.than the total future cash paynrents eh by the new terme: Artur @ DAY MON be ©. Exceeds the present value of the future eaeh pay specified by the new terme . cure caah 4. 1s Tess than the present value of the fut k nw terns payments apecitied by the new tern hich would b A + fdommea, Which We be 3. For substantial modification of tor dobt Co determine tho 1 compared to the carrying amount of syfinguishment? if the debtor should voport a gain on eaitra a. ‘The total future cash payments , ° original b. The present value of the new debt at the orig interest rate . lobt at ce. The present value of the new debt ¢ interest rate u » marke: d. The present valuc of the new debt at Che market interest rate the modified ng substantial Under a debt restructuring involving the now debt modification of terms, the present value shall be determined usi ng the a. Original effective interest rate Interest rate under the new terms c. Market rate of interest d. Prime interest rate 2 ge on he gai . There is nonsubstantial modification of terms if the gain or loss on modification is a. At least 10% of the old liability b. Less than 10% of the old liability c. At least 10% of the new liability da. Less than 10% of the new liability e 306Problem 9-20 Multiple choice (IFRIC 19) L.An entity shall initially measure equity instruments issued to extinguish a financial liability at a. Pair value of the equity instruments issued b. Fair value of the liability extinguished Par value of the equity instruments issued a. Carrying amount of the liability extinguished w 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 d. Book value of the equity instruments issued 3. 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 mesured at Carrying amount of the liability extinguished Par value of equity instruments issued Carrying amount of the equity instruments issued Value assigned by the Board of Directors po oe » .The difference between the carrying amount of the financial liability extinguished and the fair value of equity instruments issued shall be accounted for as a. Gain or loss on extinguishment. b. Other comprehensive income c. Retained earnings d. Share premium 5. The gain or loss from extinguishment of a financial liability by issuing equity instruments is presented as Other income or other expense Separate line item in the income statement Component of other comprehensive income d. Component of finance cost erp 307