MABALACAT CITY COLLEGE ACCOUNTING REVIEW 1

INSTITUTE OF BUSINESS AND EDUCATION NOTES PAYABLE AND DEBT RESTRUCTURING

Problem 1: On February 28, 2019, XYZ Company issued a 12% note payable to WWW Company for P500,000. Interest
and principal is payable on Feb 1, 2020.
Additionally, on June 30, 2019, XYZ company purchased a machine from CDE Company in exchange for a noninterest
bearing note requiring eight semiannual payments of P 200,000 every Dec and June. The first payment was made on Dec
31, 2019. At issue date, the prevailing annual interest rate for this type of note was 11%. PV of an ordinary annuity of 1
at 11% for 8 periods is 5.146 and PV of an ordinary annuity of 1 at 5.5% for 8 periods is 6.335.

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1. What is the accrued interest payable to be recorded at Dec 31, 2019 balance sheet? P 60,000

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2. How much is the interest expense to be recorded for 2019? P 129,685

Problem 2: During 2019, DEF Company issued two separate notes payable:
● On Jan 1, 2019, DEF Company purchased a machine in exchange for a noninterest bearing note requiring ten
payments of P 500,000. The first payment was made on Dec 31, 2019, and the others due annually on Dec 31.
Prevailing rate of interest for this type of note at date of issuance was 12%. The PV of an ordinary annuity of 1 at 12% for
ten periods is 5.65 while the PV of 1 at 12% for 10 years is .322.
● On April 31, 2019, DEF Company borrowed P3,000,000 from ABC Company by issuing a two-year noninterest
bearing note. Recently, the entity has paid a 12% interest for this type of note. The PV of 1 at 12% for 2 years is
.80 and the PV of an ordinary annuity of 1 at 12% for 2 years is 1.69.

1. What is the interest expense for 2019 relating to this borrowings? P 531,000
2. What is the total carrying amount for notes payable to be presented in 2019 balance sheet? P 5,256,000

Problem 3: On March 1, 2019, DVD Company borrowed P 1,000,000 and signed a 2-year interest bearing note at 12% per
annum compounded semiannually every Aug and Feb. Interest is payable in full at maturity on Feb 28, 2021.

1. What amount should be reported as accrued interest payable on Dec 31, 2019? P 102,400
2. What is the interest expense to be recorded for 2020? 136,256.64
3. How much would be paid in Feb 28, 2021 to settle the notes payable? 1,262,477

Problem 4: On July 1, 2019, CDO Company obtained a P 2,000,000, 180-day bank loan at an annual rate of 12%.

The loan agreement requires Cody to maintain a P 400,000 compensating balance in its checking account.
CDO would otherwise maintain a balance of only P 200,000 in this account. The checking account earns interest
at an annual rate of 6%. The checking account earns interest at an annual rate of 6%.

1. What is the effective interest rate on the borrowing? 12.67%

Problem 5: On April 1, 2019, JRS Company borrowed P 1,000,000 on a 10% five-year note payable.
The fair value of the note is determined to be P 975,000 and P 950,000 on December 2019 and December
2020,respectively, based on market and interest factors.
The entity has elected the fair value option for reporting the financial liability.

1. What amount should be reported as interest expense for 2019? P 75,000

2. What is the carrying amount of the note payable on Dec 31, 2019? P 975,000
3. What is the gain/loss to be recognized in 2019 as a result of the fair value option? P 25,000
4. What is the gain/loss to be recognized in 2020 as a result of the fair value option? P 25,000
5. Assume that on Dec 2021, JRS recorded an P85,000 loss from the liability, how much is the notes fair value? P
1,035,000

Problem 6: JDS Company, after having experienced financial difficulties in 2019, negotiated with a major creditor and
arrived at an agreement to restructure a note payable on Dec 31, 2019.

The creditor was owed principal of P 3,600,000 and interest of P 400,000 but agreed to accept equipment with a fair
value of P 700,000 and note receivable from JDS’ customer with carrying amount of P 2,700,000. The equipment had an
original cost of P 900,000 and accumulated depreciation of P 300,000.

1. What amount should be recognized as gain from debt extinguishment on Dec 31, 2017 under PFRS? P 700,000
2. Under US GAAP, how much should be reported as gain/loss on transfer of asset? P 100,000 Gain
3. Under US GAAP, how much should be reported as gain/loss on restructuring? P 600,000 Gain

COMPILED BY: WENSTON DEL ROSARIO ACCTGREV1_002

MABALACAT CITY COLLEGE ACCOUNTING REVIEW 1
INSTITUTE OF BUSINESS AND EDUCATION NOTES PAYABLE AND DEBT RESTRUCTURING

Problem 7: CEC Company is experiencing financial difficulty and is negotiating debt restructuring with its creditor to
relieve its financial stress. It has an outstanding P 2,500,000, 12% debt issued 1 Jul 2018 to a certain bank. It was unable
to pay interest since issuance.

On April 30, 2019, the bank accepted an equity interest in CEC Company in the form of 200,000 ordinary shares quoted
at P12 per share. The par value is P 10 per share.

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The fair value of the note payable on the date of restructuring is P 2,300,000.

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1. What amount should be recognized as gain from debt extinguishment as a result of the equity swap? P 350,000
2. What amount should be recognized as share premium from the issuance of the shares? P 400,000
3. If the shares have no fair value, what amount should be recognized as gain on extinguishment? P 450,000
4. If both the shares and the note payable do not have fair value, what amount should be recognized as gain from
extinguishment of debt? P Zero

Problem 8:During 2019, MNO Company experience financial difficulties and is likely to default on a P 5,000,000, 12%
three-year note dated Jan 1, 2017.Interest was being paid semiannually until June 30, 2019 when the company started
being in trouble. On Dec 31, 2019, the bank agreed to settle the note and unpaid interest for the last 6mos for P 4,770,000
cash payable on Jan 31, 2020.
1. What amount should be reported as gain from extinguishment of debt in 2019? P 530,000

Problem 8: Due to extreme financial difficulties, ARMM Company had negotiated a restructuring of a 10% P 5,000,000
note payable due on Dec 31, 2019. Unpaid interest on the note on such date is P 375,000.

The creditor had agreed to reduce the face value to P 4,000,000, forgive the unpaid interest, reduce the interest rate to
8% and extend the due date three years from Dec 31, 2019.

The PV of 1 at 10% for three periods is 0.75 and the PV of an ordinary annuity of 1 at 10% for three periods is 2.49.

1. What is the gain on extinguishment of debt in 2019? P 1578,200

2. What is the interest expense for 2020? P 379,680
3. Assume that the modified terms were as follows: Face amount is reduced only by P200,000, unpaid interest is
forgiven, retain interest rate, and term extended to 1 year only from 2019. How much is the gain on
extinguishment to be recognized in 2019? (relevant PV factor is .90) Zero
4. What is the discount/premium on the new notes payable using the assumptions in #3? P 575,000 premium

COMPILED BY: WENSTON DEL ROSARIO ACCTGREV1_002