MODULE # 13

PRACTICAL ACCOUNTING 1 – REVIEW

NOTES PAYABLE & DEBT RESRUCTURING
PROF. U.C. VALLADOLID

Multiple Choice
Identify the choice that best completes the statement or answers the question.

1. At year-end, De Vera Company issued a 2,000,000 face amount note payable in exchange for
services rendered. The note, made at usual trade terms, is due in nine months and bears
interest, payable at maturity, at the annual rate of 3%. The market interest rate is 8%. The
compound interest factor of 1 due in nine months at 8% is.944. At what amount should be the
note payable be reported at year-end?
a. 1,888,000 b. 1,930,400 c. 2,000,000 d. 2,060,000

2. Single Club Company had note payable amounting to 6,450,000 to the bank for them to fund
their new project on May 1, 2020. The company signed a 4-year note bearing interest @ 6%.
On April 30, 2022, the interest is payable in full at its maturity. The note signed was
compounded annually.

On December 31, 2021, what will be the amount of the accrued interest liability?
a. 410,220 b. 273,480 c. 660,480 d. 387,000

3. Minho Company had a 3,200,000 note payable due on June 30, 2020. On December 31, 2019,
the entity signed an agreement to borrow up to 3,200,000 to refinance the note payable on a
long-term basis.
 The financing agreement called for borrowing not to exceed 80% of the value of the collateral
the entity was providing. On December 31, 2019, the value of the collateral was 2,700,000.

On December 31, 2019, what amount of the note payable should be reported as current
liability?
a. 3,200,000 b. 500,000 c. 2,700,000 d. 1,040,000

4. On January 1, 2021, Eva Co. sold an equipment to Adan Co. Adan gave Eva a 2,400,000
noninterest bearing note payable in three equal annual installment of 800,000 with the first
payment due December 31, 2021. The prevailing rate of interest for a note of this type is 10%.
The present value of the note is 1,989,600.

1. What is the discount on note payable on January 1, 2021?

a. 410,400 b. 2,201,040 c. 400,000 d. 1,790,640

2. What is the interest expense for 2021?

a. 240,000 b. 80,000 c. 198,960 d. 0
 3. What is the discount on note payable on December 31, 2021?
a. 205,200 b. 198,960 c. 211,440 d. 240,000

4. What is the carrying amount of the note payable on December 31, 2021?
a. 1,388,560 b. 1,600,000 c. 2,201,040 d. 1,989,600

5. A note payable to the Bank of the Philippine Islands for 2,400,000 is outstanding on December
31, 2020. The note is dated October 1, 2019, bears interest at 18%, and is payable in three
equal annual installment of 800,000. The first interest and principal payment was made on
October 1, 2020.

1. What should be reported as the current liability on December 31, 2020?

a. 800,000 b. 908,000 c. 72,000 d. 872,000

2. What should be reported as the accrued interest payable on December 31, 2020?
a. 800,000 b. 908,000 c. 72,000 d. 872,000
6. On January 1, 2020, CARRIE Company borrowed 1,000,000, 9%, interest-bearing note due in
five years. The present value of the note is 835,000. The company has elected fair value option
for this liability. At the end of the current year, the fair value of the note is 873,000.

1. What is the carrying amount of the note at the end of the year?
a. 835,000 b. 873,000 c. 890,000 d. 1,000,000

2. What amount should be reported as interest expense for 2020?

a. 75,150 b. 78,570 c. 90,000 d. 91,570

3. What amount should be reported as net gain from change in fair value in 2020?
a. 165,000 b. 127,000 c. 38,000 d. 0

7. ACE Company, after having experienced financial difficulties in 2022, negotiated with a major
creditor and arrived at an agreement to restructure a note payable on December 31, 2022.

The creditor was owned principal of 4,000,000 and interest of 200,000 but agreed to accept
equipment worth 900,000 and note receivable from an ACE Company’s customer with a
carrying amount of 3,000,000.

The equipment had an original cost of 1,200,000 and accumulated depreciation of 500,000.

What amount should be recognized as gain from debt extinguishment on December 31, 2020?
a. 800,000 b. 200,000 c. 100,000 d. 500,000
8. On December 31, 2020, Phoebe Company shows the following data with respect to its matured
obligation.

Notes Payable 5,520,000

Accrued Interest Payable 680,000

The company is threatened with a court suit if could not pay its maturing debt. Accordingly, the
company enters into an agreement with the creditor for the transfer of a non-cash asset in full
settlement of the mortgage. The agreement provides for the transfer of real estate carried in the
books of Phoebe at 3,000,000. The real estate has a current fair market value of 4,500,000.

What total amount should the Phoebe recognize in profit or loss for the year 2020 as a result of
this transaction?
a. 500,000 b. 1,000,000 c. 1,500,000 d. 3,200,000

9. PCY Enterprises is experiencing financial distress and is negotiating debt restructuring with its
creditor to relieve its financial difficulty. PCY Enterprises has a 5,000,000 note payable to SM
Financials. SM Financials accepted an equity interest in the form of 100,000 ordinary shares
with a par value of 40 and quoted at 45. The fair value of the note payable on the date of
restructuring is 4,400,000. What amount should be recognized as gain from extinguishment as a
result of equity swap?
a. 500,000 b. 600,000 c. 1,000,000 d. No gain is recorded.
10. Moon corp. have a matured notes payable amounting to 3,000,000 plus accrued interest of
750,000. Moon corp. was sued by Sunrise Co. and they both agreed for the issuance of
ordinary share capital for the full settlement of the obligation. The agreement provides the
following:

Issuance of 35,000 shares, 55 par.

Market value of the shares, 75
Fair value of the notes payable on date of restructuring, 2,700,000

Using equity-swap, what is the gain/loss from extinguishment of the debt and the share
premium from the issuance of the shares?
a. 1,825,000; 700,000 b. 1,125,000; 700,000
c. 825,000; 700,000 d. 75,000; 700,000

11. Shift Company entered into agreement with its creditors to reconstruct the terms of its 5,000,000
notes receivable on December 31, 2020. The agreement term is as follows:

Reduced the Principal to 3,000,000

Forgiven accrued interest of 500,000
Change the interest rate from 10% to 8%
Extended the maturity from December 31, 2020 to December 31, 2025.

What is the gain/loss on the modification of the debt? (Use 5 decimal places on PV/Annuity
factors)
a. 2,727,450.40 b. 2,772,549.60 c. 2,277,450.40 d. 2,272,549.60
12. On January 1, 2020, Sonic Corp had an overdue 10% notes payable to BDO at 2,300,000 and
accrued interest of 540,000. BDO agreed to the following provisions, as a result of a
restructuring agreement on year end 2020:

-Reduction in principal obligation to 2,000,000

-Accrued interest is not to be paid anymore
-Annual interest of 11% is to be repaid for 5 years every year end

Present value of 1 at 10% for 5 periods is 0.62. present value of an ordinary annuity of 1 at 10%
for 5 periods is 3.79.

What is the gain on extinguishment of debt?

a. 1,510,000 b. 2,840,000 c. 1,330,000 d. 4,350,000 e. 766,200

13. Grow Company had bonds payable with a face value of 5,000,000 and a carrying amount of
4,800,000. In addition, unpaid interest on the bonds was accrued in the amount of 250,000. The
creditor had agreed to the settlement of the bonds payable in exchange for 50,000 shares of 50
par value. The shares have no reliable measure of fair value. However, the bonds are quoted at
3,500,000.

1. What is the gain on extinguishment of the bonds payable?

a. 1,500,000 b. 1,300,000 c. 1,550,000 d. 1,750,000
 2. 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

14. SPig Company experienced financial distress on 2,000,000. 10% 2 year note payable to Land
bank. October 1, 2019, the bank agreed to settle the note and unpaid interest of 750,000 for
2,000,000 cash payable on January 1, 2020.

What amount should be reported as gain from extinguishment of debt?

a. 85,000 b. 650,000 c. 750,000 d. 0

15. On February 29, 2020, Toben Company borrowed 500,000 on a 10% note payable due on 5
years. On December 31, 2020, the fair value of note is determined to be 487,500 based on
market and interest factors. The company elected the fair value option for reporting financial
liability.

What is the gain or loss to be recognized in 2020 as a result of the fair value option?
a. 0 b. 1,250 loss c. 12,500 loss d. 12,500 gain

16. Benjamin Company borrowed 2,000,000 on a 10% five year note payable on July 1, 2019.
 On December 31, 2019, the fair value of the note is determined to be 1,975,000 based on
market and interest factors.

The entity has elected the fair value option for reporting the financial liability.

What is the carrying amount of the note payable on December 31, 2019?
a. 2,000,000 b. 1,975,000 c. 500,000 d. 1,900,000

17. On December 31, 2021, Juvia Company purchased a machine from Mira Company in exchange
for a noninterest bearing note requiring eight payments of 400,000.

The first payment was made on December 31, 2021 and the others are due annually on
December 31.

At date of issuance, the prevailing note of interest for this type of note was 11%. The PV of an
ordinary annuity of 1 at 11% for 8 periods is 5.146, and the PV of an annuity of 1 in advance at
11% for 8 periods is 5.712.

Notes: we use ordinary annuity if the first payment will happen after a year whereas we use
annuity in advance if the payment will happen in the same date just like the given problem.

On December 31, 2021, what is the carrying amount of the note payable?
a. 2,284,800 b. 1,884,800 c. 2,058,400 d. 1,658,400

18. Mabuhay Company had notes payable of 3,000,000 and accrued interest payable of 700,000 on
December 31, 2020. Mabuhay is threatened with a court suit if it could not pay a maturing debt.
Mabuhay entered into an agreement with the creditor for the issuance of share capital in full
settlement on the note payable. The agreement provided for the issuance of 20,000 shares, par
value 100. The share is currently quoted at 120. The fair value of the notes on the date of
restructuring is 2,600,000.

What amount should be recognized as gain from extinguishment of debt?

a. 1,300,000 b. 1,700,000 c. 400,000 d. 1,100,000
19. My company is in financial trouble and could not meet maturing installments and interest on its
bank loan of 5,000,000. The accrued interest on the loan to date is 1,000,000.

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 land is 1,500,000 and the building, 6,000,000v with accumulated depreciation of
1,800,000. The fair value of the land and building is about 5,900,000.

Compute the gain or loss on extinguishment of debt.

a. 500,000 b. 400,000 c. 300,000 d. 200,000

20. Barbie Company had a bonds payable with face amount of 4,900,000 and accrued interest of
200,000. The carrying amount of the bonds is 4,500,000. The creditor agreed to the settlement
of bonds with an exchange of 60,000 shares with a 55 par value. The bonds are quoted at
3,750,000.

1. What amount should be reported as gain on the extinguishment of the bonds payable?
a. 950,000 b. 1,300,000 c. 1,350,000 d. 1,400,000

2. What amount should be recorded as share premium from the issuance of shares?
a. 400,000 b. 450,000 c. 500,000 d. 550,000