ASSET SWAP (Same w/ Dacion en pago accounting)

An entity provided the following balances at year-end:

Notes payable 2,000,000

Accrued interest payable 400,000

At year-end, the entity transferred to the creditor land with carrying amount of P1,500,000 and fair
value of P2,200,000.

Journal Entry:

Land costing P500,000 and building costing P4,000,000 with accumulated depreciation of P800,000,
were mortgaged to secure a bank loan of P3,000,000.

3,000,00
Face amount of the loan 0
Accrued interest payable 200,000
Legal fee and bank service charges 50,000

Subsequently, the land and building were given to the bank in full payment of the liability.

Journal Entry

Equity Swap

The entity showed the following data at year-end:

5,000,00
Bonds payable 0
Accrued interest payable 500,000

The entity issued share capital with a total par value of P2,000,000 and fair value of P4,500,000 in full
settlement of the bonds payable and accrued interest.

On the other hand, the fair value of the bonds payable is P4,700,000.

Journal entry if :

FV of shares issued is used

FV of bonds is used

Carrying amount of bonds payable is used

Quasi- reorganization ( Corporate readjustment) -a permissive but not mandatory procedure under
which a financially troubled entity restates its accounts and establishes a “fresh start” in accounting
sense.

Specifically, a quasi-reorganization is the procedure of restating assets, liabilities and share capital
balances in conformity with fair value for the purpose of eliminating a deficit.

a. Recapitalization

b. Revaluation of property, plant and equipment

Circumstances that may justify quasi-reorganization

a. When a large deficit exists.

b. When approved by the shareholder and creditors

c. When the cost basis of the accounting for PPE becomes unrealistic. An entity in financial difficulty may
be permitted by the SEC to undergo a quasi-reorganization and in the process may be allowed to revalue
its PPE if their current value is substantially more than their cost.

d. When a “fresh start” appears to be desirable or advantageous to all parties concerned.

A quasi reorganization must be approved by the SEC.

RECAPITALIZATION

An entity provided the following statement of financial position on December 31, 2017 prior to quasi-
reorganization:

Current assets 1,000,000

Property, plant and equipment 7,500,000
Accumulated depreciation (1,000,000) 6,500,000
7,500,000

Liabilities 4,500,000
Share Capital, P100 par, 50,000 shares 5,000,000
Retained earnings(deficit) (2,000,000)
7,500,000

On December 31, 2017, the shareholders and creditors agreed to a quasi-reorganization. Accordingly,
the following restatements should be made:

a. The property, plant and equipment shall be recorded at the fair value of P6,000,000

b. The inventory is overvalued to the extent of P250,000 and shall be revalued accordingly.
c. The share capital is reduced to P2,000,000 , 20,000 shares, P100 par value.

d. The resulting deficit is charged to the share premium arising from the reorganization.

REVALUATION

An entity has sustained heavy losses over a period of time and conditions warrant that the entity should
undergo a quasi-reorganization on December 31, 2017.

The statement of financial position on December 31, 2017 prior to the reorganization is:

Current Assets 1,000,000

Property, plant and
equipment 5,000,000
Accumulated depreciation (1,500,000) 3,500,000
Goodwill 100,000
4,600,000

Current Liabilities 1,100,000

Share capital, P100 par 5,000,000
Share premium 500,000
Retained Earnings (2,000,000)
4,600,000

The Securities and Exchange Commision approved the quasi-reorganization on the basis of the
unrealistic valuation of PPE.

Accordingly, the SEC recommended that the property, plant and equipment be revalued by an
independent expert.

1. The propert, plant and equipment are determined to have replacement cost of P9,000,000.

2. The inventory is to be written down by P400,000

3. The goodwill is to be written off.

4. Unrecorded accounts payable amounted to P200,000

5. Any resulting deficit is charged against the revaluation surplus.