PROBLEMS

Problem 9-1 (ACP)

Youth Company is in financial trouble and could not meet maturing installments and interest on
its bank loan of P5,000,000 . The accrued interest on the loan to date is P1,000,000.
The entity and the bank agreed on a "dacion en pago" arrangement. Thus, the mortgage land
and building were given by the entity as full payment for 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 the building is about 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 balances on December 31 2020:
Note payable – due December 31, 2020 1,000,000
Accrued interest payable 200,000

The entity is in financial distress and negotiates 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 has 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

Problem 9-3 (IAA)

Sundown Company has bonds payable with face amount of P5,000,000 and a carrying amount
of P5,150,000. In addition , unpaid interest on the bonds has been accrued in the amount of
P300,000.
The creditor has agreed to the settlement of the bonds payable in exchange for land with fair
value of P4,500,000. The land has a historical cost of P3,200,000.
Required:
Prepare journal entries necessary on the books of Sundown Company to record the settlement
of the bonds payable.

Problem 9-4 (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 is threatened with the 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.
The agreement provided for the issue of 35 000 shares with the par value of P100. The share is
currently quoted at P130 . The fair value of the liability is P4,700,000.
Required:
Prepare journal entry to record the equity swap on the books of Sunshine Company:
1. If the fair value of the share capital is issued for the equity swap.
2. If the fair value of the liability is used for equity swap.
3. If the carrying amount of the liability is used for the equity swap.

Problem 9-5 (IAA)

Star Company has outstanding of P6,000,000 note payable to an investment entity. Accrued
interest payable on this note amounted to P600,000.
Because of the financial difficulties, the entity negotiated with the investment entity to
exchange inventory of machine parts to satisfy the debt.
The inventory transferred is carried of P3,600,000 . The estimated retail value of the inventory is
P5,600,000. The perpetual inventory system is used.
Required:
Prepare journal entry necessary on the books of Star Company to record the settlement of the
note payable.

Problem 9-6 (IAA)

Quest Company is 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 has entered into agreement with the creditor to exchange equity instruments for the
financial liability.
The terms of the exchange are P300,000 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 financial liability is P4,800,000.
Required:
Prepare journal entry on the books of Quest Company to record the settlement of the note
payable:
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 financial liability is used.

Problem 9-7 (IAA)

Sunset Company has bonds payable with face amount of P5,000,000 and a carrying amount of
P4,800,000.
In addition, unpaid interest on the bonds was accrued in the amount of P250,000.
The creditor agreed to the settlement of the bonds payable in exchange for 50,000 shares of
P50 par value.
The shares have a current market value of P4,500,000 . The fair value of the bonds payable is
P4,600,000.
Required:
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 instruments is used.
2. If the fair value of the bonds is used
3. If the carrying amount of the financial liability is used.

Problem 9-8 (IAA)

Baguio Company is experiencing financial difficulty and is renegotiating debt security with a
creditor to relieve its financial stress.
The entity has a P5,000,000 note payable to First Bank. The bank is considering two alternatives.
1. Acceptance of the land owned by the entity valued at P4,000,000 and carried at its historical
cost of P2,800,000.
2. Acceptance of an equity interest in the entity in the form of 40,000 shares with fair value of
P120 per share . The share capital as the par value of P100 per share.
Required:
Preparing journal entry that Baguio Company would make under each alternative.

Problem 9-9 ( AICPA Adapted)

Grey Company had an overdue 8% note payable to City Bank at P8,000,000 with accrued
interest of P640,000.
As a result of the settlement on January 1, 2020, City Bank agreed to the following restructuring
arrangement:
a. Reduce the principal obligation to seven million .
b. Forgave the P640,000 accrued interest.
c. Extended the maturity date to December 31, 2020.
d. Annual interest of 10% is to be paid on December 31, 2020 and 2021.

The present value of one at 8% for two periods is 0.8573, and the present value of an ordinary
annuity of 1 at 8% for two periods is 1.7833.
Required:
Prepare journal entries for 2020 and 2021 to record the modification of terms.

Problem 9-10 (AICPA Adapted)

On January 1, 2020 , Sunrise Company is experiencing extreme financial pressure and is in
default in meeting interest payment on a long-term note of P6,000,000 due on December 31,
2020.
The interest rate is 12% payable every December 31 . The accrued interest payable on January
1, 2020 is P720,000. In an agreement with the creditor, the entity obtained the following
changes in the terms of note:
1. The accrued interest on January 1, 2020 is forgiven.
2. The principal is reduced by 500,000.
3.The new interest rate is 8% payable every December 31.
4. The new date of maturity is December 31, 2023.
The present value of 1 at 12% for four periods is 0. 6355 and the present value of an ordinary
annuity of 1 at 12% for four periods is 3.0373.
Required:
Prepare all indicated entries for 2020

Problem 9-11 (IAA)

Due to adverse economic circumstances and poor management, bontoc company has
negotiated a restructuring of P8,500,000 note payable to Second Bank.
The bank has agreed to reduce the face amount of the note from P8,500,000 to P8,000,000,
reduce the interest rate from 14% to 10% , and extend the due date 1 year from date of
restructuring.
The restructuring was done at the beginning of the current year. There is no unpaid interest on
the restructured note at this time.
The present value of 1 at 14% for 1 period is 0.8772 and the present value of an ordinary
annuity of 1 for two periods at 14% is 1.6467.
Required:
Prepare journal entries for the current year.

Problem 9-12 (IAA)

White Company is indebted to Black Company for P5,000,000 on January 1, 2020 the principal
and accrued interest of P1,000,000 are long overdue. The interest on the note is 10% .
The entity negotiated with Black Company for the restructuring of the obligation .
1. The principal obligation is reduced by P500,000.
2. The accrued interest of P1,000,000 is waived.
3. The obligation will mature on December 31, 2021.
4. The entity shall pay an annual interest of 12% every December 31.
The present value of 1 at 10% for two periods is 0.8264 the present value of an ordinary annuity
of 1 at 10% for two periods is 1.7355.
Required:
Prepare journal entries for 2020.

Problem 9-13 (AICPA Adapted)

Hull Company is indebted to Apex Company under a P5,000,000, 12%, three-year note dated
December 31, 2018 .
Because of financial difficulties developing in 2020, Hull Company owed accrued interest of
P600,000 on the note on December 31, 2020.
Under a debt restructuring on December 31, 2020. Apex Company agreed to settle the note and
accrued interest for a tract of land having a fair value of P4,500,000. The acquisition cost of the
land is P3,600,000.
What amount of pre-tax gain extinguishment should Hull Company report as component of
income from continuing operation in 2020?
a. 2,000,000
b. 1,400,000
c. 1,100,000
d. 900,000
Problem 9-14
The following information pertains to the transfer of real estate pursuant to a debt restructuring
by Knob Company to Mene Company in full 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 million Fair value of real estate transferred 1200,000
What amount of pre-tax gain extinguishment should Knob Company report as component of
income from continuing operations?
a. 300,000
b. 500,000
c. 200,000
d. 0
Problem 9-15 (AICPA Adapted)
During 2020, Mann Company experienced financial difficulties and is likely to default on a
P5,000,000, 15%, three-year note dated January 1, 2018 payable to Summit Bank on December
31, 2020.
The bank agreed to settle the note and unpaid interest of P750,000 for P4,100,000 cash payable
on January 31, 202.
What amount should be reported as gain from extinguishment of debt in the 2020 income
statement?
a. 1,650,000
 b. 900,000
c. 750,000
d. 0
Problem 9-16 (AICPA Adapted)
Due to extreme financial difficulties, Armada Company had negotiated a restructuring of 10%,
P5,000,000 note payable due on December 31, 2020 the unpaid interest on the note on such
date was P500,000.
The creditor agreed to reduce the face amount to P4,000,000, forgive the unpaid interest,
reduce the interest rate to 8% and extend the due date three years from December 31, 2020 .
The present value of 1 at 10% for three periods is 0.75 and the present value of an ordinary
annuity of 1 at 10% for three periods is 2.49.
1. What is the gain on extinguishment for 2020?
a. 1,703,200
b. 1,203,200
c. 2,000,000
d. 540,000
2. What is the interest expense for 2021?
a. 320,000
b. 379,680
c. 500,000
d. 400,000
Problem 9-17 (IAA)
Due to adverse economic circumstances and poor management, Tagaytay Highlands Company
had negotiated a restructuring of 9%, P6,000,000 note payable to Second Bank do on January 1,
2020. There was no accrued interest on the note on January 1, 2020.
The bank reduced the principal obligation from P6,000,000 to P5,000,000 and extended the
maturity to three-years on December 31, 2022.
However, the new interest rate is 13% payable annually every December 31.
The present value of 1 at 9% for three periods is .77 and the present value of an ordinary
annuity of 1 at 9% for three periods is 2.53.
1.What is the present value of the new note payable on january 1 2020
a. 6,000,000
 b. 5,000,000
c. 5,494,500
d. 3,850,000
2.What is the game on modification of debt to be recognized for 2020?
a. 500,000
b. 350,000
c. 505,500
d. 0
3. What is the interest expense for 2020 as a result of the modification?
a. 650,000
b. 450,000
c. 494,505
d. 540,000
Problem 9-18 (AICPA Adapted)
On January 1, 2020, Granada Company had overdue 10% note payable to First Bank at
P8,000,000 and accrued interest for P800,000.
As a result of restructuring and agreement on January 1, 2020, First Bank agreement to the
following provisions:
* The principal obligation is reduced to P6,000,000.
* The accrued interest of P800,000 is forgiven.
* The date of maturity is extended to December 31, 2023.
* Annual interest of 12% is to be paid for four years every December 31.
The present value of 1 at 10% for 4 periods is 0.683 and the present value of an ordinary
annuity of 1 at 10% for 4 periods is 3.17.
1.What is the present value of a new note payable on January 1, 2020?
a. 6,380,400
b. 6,000,000
c. 4,098,000
d. 5,464,000
2.What is the gain on extinguishment of debt to be recognized for 2020?
a. 2,000,000
 b. 2,800,000
c. 2,419,600
d. 1,619,600
3. What is the interest expense to be recognized for 2020?
a. 720,000
b. 800,000
c. 600,000
d. 638,040
Problem 9-19 Multiple choice (IFRS)
1. In a debt restructuring that is considered an asset swap , the gain on extinguishment is equal
to
a. Excess of the fair value of the asset over the carrying amount
b. Excess of the carrying amount of the debt over the fair value of the asset
c. Excess of the fair value of the asset over its carrying amount of debt
d. Excess of the carrying amount of the debt over the carrying amount of the asset.
2. For a debt restructuring involving substantial modification of terms, it is appropriate for a
debtor to recognize a gain when the carrying amount of the debt.
a. Exceeds the total future cash payments specified by the new terms
b. Is less than the total future cash payments specified by the new terms
c. Exceeds the present value of the future cash payments specified by the new terms
d. Is less than the present value of the future cash payments specified by the new terms
3. For a debt restructuring involving a substantial modification of terms, which of the following
the specified by the new terms would be compared to the carrying amount of the debt to
determine if the debtor should report a gain on extinguishment?
a. The total future cash payments
b. The present value of the debt at the original interest rate
c. The present value of the debt at the modified interest rate
d. The amount of future cash payments
4. Under a debt restructuring involving substantial modification of terms, the future cash flows
under the new terms shall be discounted using
a. Original effective interest rate
b. Interest rate under the new terms
c. Market rate of interest
 d. Prime interest rate
Problem 9-20 Multiple Choice (IFRIC 19)
1. An entity shall initially measure equity instruments issued to extinguishment a financial
liability at
a. Fair value of the equity instruments issued
b. Fair value of the liability extinguishment
c. Par value of the equity instruments issued
d. Carrying amount of the liability extinguished
2. If the fair value of an equity instruments issued cannot be reliably measured, the equity
instruments used to extinguish 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 ability 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
measured at
a. Carrying amount of the liability extinguished
b. Par value of equity instruments issued
c. Carrying amount of the equity instruments issued
d. Value assigned by the Board of Directors
4. The difference between the carrying amount of the financial liability extinguished and the fair
value of equity instruments issued shall be recognized in
a. Profit or loss
b. Other comprehensive income
c. Retained earnings
d. General reserve
5. The gain or loss from extinguishment of a financial a liability by issuing equity instruments is
presented as
a. Other income or other expense
b. Separate line item in the income statement
c. Component of other comprehensive income
d. Component of finance cost