PAMANTASAN NG LUNGSODNG VALENZUELA interest of P200,000 at the time.

interest of P200,000 at the time. The transaction incurred P50,000 for legal and bank service
charges.
Junior Philippine Institute of Accountants
Accounting Scholastic Guild 2. Equity Swap is a transaction whereby a debtor and creditor may renegotiate the terms of a
Ate/Kuya System 2019 financial liability with the result that the liability is fully or partially extinguished by the debtor
issuing equity instruments to the creditor.

Intermediate Accounting II Pro forma journal entry

Note Payable
Lecture 04: Debt Restructuring and Bonds Payable Interest expense *
Loss on Extinguishment
Share Capital
Debt Restructuring is a situation where the creditor, for economic or legal reasons related to the Share Premium **
debtor’s financial difficulties, grants to the debtor concession that would not otherwise be granted in a Gain on Extinguishment
normal business relationship. * Carrying amount of liability extinguished.
** Measured at the following amounts in the order of priority:
Types of Debt Restructuring a. Fair value of equity instrument issued
1. Asset Swap is the transfer by the debtor to the creditor of any asset, such as real estate, inventory, b. Fair value of liability extinguished
receivable and investments, in full payment of an obligation. c. Carrying amount of liability extinguished.
Dacion en pago arises when a mortgaged property is offered by the debtor in full settlement of the
debt. SAMPLE PROBLEM:
An entity showed the following data on December 31, 2015.
Pro forma computation Bonds payable P5,000,000
Total liability extinguished * Accrued interest payable 500,000
Note/Other Payable xxx On December 31, 2015, the entity issued share capital with a total par value of P2,000,000.
Add: Accrued interest xxx
Other Charges xxx xxx Case 1 The fair value of the share capital issued is P4,500,000.
Less: Carrying amount of asset offered ** Case 2 The fair value of the bonds payable is P4,700,000.
Historical cost xxx Case 3 No additional data available.
Less: Accumulated depreciation as of the date (xxx) (xxx)
Gain (Loss) on extinguishment of debt *** xxx
3. Modification of terms may involve either the modification of principal, interest, maturity date or
Pro forma journal entry all of terms.
Note Payable
Interest expense * Determine whether there is a “substantial modification”
Accumulated depreciation IF YES: Gain/Loss should be recognized.
Asset offered ** NO: No gain/loss to be recognized and new effective interest rate will be computed using
Gain on extinguishment of debt *** interpolation.

SAMPLE PROBLEM: Q: How to know if there is a substantial modification?

Land costing P500,000 and building costing P4,000,000 with accumulated depreciation of A: If the gain/loss on extinguishment is at least 10% of the old financial liability.
P800,000, were transferred to the bank in full payment of a P3,000,000 loan with an accrued

AKS-Intermediate Accounting II: Lecture 04 – Debt Restructuring jvacpa Page 1 of 3

 Q: How to compute for the gain/loss on extinguishment?  Registered Bonds- require the registration of the name of the bondholders on the books of the
A: Proforma computation: corporation.
 Coupon or Bearer Bonds- unregistered bonds.
Carrying amount of financial liability at the date of extinguishment *  Convertible Bonds- can be exchanged for shares of issuing entity.
LESS: Present value of the new liability discounted using the old effective rate** .  Callable Bonds- may be called in for redemption prior to maturity date.
Gain/loss on extinguishment***  Guaranteed Bonds- another party promises to make payment id the borrowers fails to
do so.
Pro forma journal entry  Junk Bonds- High-yield bonds issued by entities that are heavily indebted.
Note Payable – old
Interest expense * INITIAL MEASUREMENT OF BONDS
Discount on Notes Payable PFRS 9, paragraph 5.1.1, provides that bonds payable not designated at fair value through profit
Note Payable – new ** or loss shall be measured initially at fair value minus transaction costs that are directly attributable to
Premium on note payable the issue of the bonds payable.
Gain on extinguishment of debt *** However, if the bonds are designated and accounted for at fair value through profit or loss, the
bond issue costs are treated as expense immediately.
SAMPLE PROBLEM:
Bond issue costs- transaction costs directly attributable to the issue of bonds payable
On January 1, 2015, an entity showed the following:
Note payable – due 1/1/15 P5,000,000 Example:
Accrued interest payable P1,000,000  Printing and engraving cost
 Legal and accounting fee
The entity is granted by the creditor the following concessions:  Registration fee with regulatory authorities
 Commission paid to agents and underwriters and other similar charges.
CASE1: The nominal rate of the old note payable is 14%. The accrued interest is forgiven. The
principal obligation is reduced to P4,000,000. The new interest rate is 10% payable every
December 31. The new date of maturity is December 2018. SUBSEQUENT MEASUREMENT OF BONDS PAYABLE
a. At amortized cost., using the effective interest method
CASE 2:The nominal rate of the old note payable is 10%. The accrued interest is forgiven. The b. At fair value through profit or loss.
interest rate is 14% payable every December 31. The date of maturity is December 2017.
ACCOUNTING FOR ISSUANCE OF BONDS
BONDS- is a formal unconditional promise made under seal to pay a specified sum of money at a a. Memorandum Approach
determinable future date, and to make periodic interest payments at a stated rate until the principal sum b. Journal Entry Approach
is paid.

Bondholder- creditor  Amortized cost of Bonds Payable

-Issuance of bonds at a Premium- if the sales price is more than the face amount of the bonds.
Bond issuer- debtor -Issuance of bonds at a Discount- if the sales price is less than the face amount of the bonds.

Bond indenture- certificate evidencing the contractual agreement between the issuer and investor. Amortization of Bond Discount or Premium
a. Straight line - equal amount of premium or discount amortization each accounting period.
TYPES OF BOND: b. Bond Outstanding method- applicable to serial bonds and provides a decreasing amount of
 Term Bonds- single date of maturity. amortization.
 Serial Bonds- series of maturity dates. c. Effective Interest Method
 Mortgage Bonds- secured by a mortgage on real property. -Nominal Rate- rate appearing on the face of the bond certificate.
 Collateral Trust Bonds- secured by shares and bonds of other corporation.
 Debenture Bonds- bonds without collateral security.
AKS-Intermediate Accounting II: Lecture 04 – Debt Restructuring jvacpa Page 2 of 3
 -Effective Rate- rate that exactly discounts estimated cash future payments through the
expected life of the bonds payable.

Example:
On June 1, 2017, Java Company issued 10% bonds with face amount of P6,000,000 to yield 12%.
Interest is payable annually on June 1 of each year. The bonds mature in 5 years.
1. Determine the market price.
2. Determine the discount/premium
3. Prepare an amortization table

 Fair Value of Bonds Payable

The bonds payable shall be measured initially at fair value and remeasured at every year-end
with any changes in fair value generally recognized in profit or loss. No more amortization of
bond discount or premium and any transaction cost or bond issue cost should be expense
immediately.

Change in fair value recognized in OCI

a. The change in fair value attributable to the credit risk of the liability is recognized in
OCI.
Credit Risk- risk that the issuer of the liability would cause a financial loss to the other
party by failing to discharge the obligation.
b. The remaining amount of the change in fair value is recognized in profit or loss.

If presenting the change in fair value attributable to credit risk would create or enlarge an
accounting mismatch, all gains and losses including the effects of changes in credit risk are
recognized in profit or loss.

BOND RETIREMENT
a. On Maturity date
b. Prior to Maturity date

Treasury Bonds- entity’s own bonds originally issued and reacquired but not canceled.
Bond Refunding- floating of new bonds the proceeds from which are used in paying the original
bonds.

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