MULTIPLE CHOICE - COMPUTATIONAL CHAPTER 8

8-1 Among the provisions of the plan of reorgnzation confirmed by SEC for
Wow Company were the following:

Amend articles of incorporation to authorize 10,000 shares at 12%, P1 par

preferred stock and 15,000 shares of new P2 par common stock. 10,000
shares of the new common stock were to be exchanged on a share-for-share
bsis for all 10,000 shares of the P100 par common stock currently
outstanding.

Exchange 5,000 shares of the P1 par12% preferred stock ( at a current fair

value of P10 of a share) to creditors for trade accounts payable totaling
P52,000.

Pay 80 centavos on the peso for tade accounts payable totaling P62,700.

In recording the abve ptovisions of reorganizations, total gain on debt

discharge is:

a. P14,540

b. P12,540

c. P2,000

d. P10,540

8-2 When th Samar Company filed for reorganization, a trusteee was

appointed All corporate assets were transferred to te trustee on April 27,
2013. On May 27, 2013 the trustee paid P12,000 of old accounts payable.

What entry should the trustee's books make to record the payment?

a. No entry.

b. Accounts payble (old) P12,000

Cash P12,000

c. Samar Company in tusteeeship P12,000

Cash P12,000

d.Accounts payable P12,000

Samar Company in trusteeship P12,000

8-3 Using the data in 8-2, what entryshould the Samar Company make on its
books to record the payment?

a. No entry

b. Accounts payable (Old) P12,000

 Cash P12,000

c. Accounts payable (Old) P12,000

Trustee P12,000

d. Trustee P12,000

Accounts payable (Old) P12,000

8-4 Cebu, Inc,. is indebted to Day Finance Company under a P600,000, 10 %,

5 year note dated January 1, 2011. Interest, payale annually on December 31,
was paid on the December 33, 2011 and 2012, due dates. However, during
2013, Cebu experienced severe financial difficulties and is likely to default on
the note and interest unles some concessions are made. On December 31,
2013, Cebu and Day signed an agreement restructuring the debt as follows:

Interest for 2013 was reduced to P30,000, payable March 31, 2014.
Interest payment each year were reduced to P40,000 per year for 2014 and
2015.
The principal amount was reduced to P400,000.

What is the amount of gain that Cebu should report on the debt restructuring
for the year ended December 31, 2013?
a. P120,000
b. P150,000
c. P200,000
d. P230,000

8-5 The Hulk Company is indebted to Ape Company under at P500,000, 12 %

, 3- year onte dated December 31, 2011. Because of Hulk's financial
difficulties developing in 2013, Hulk owed accrued interest of P60,000 on the
note at December 31, 2013. Under a troubled interest for a tract of land
having fair value of P450,000. Hulk's acquisition cost of land is P360,000. On
its 2013 statement of comprehensive income Hulk should report as a result of
the troubled debt restructuring.
Other comprehensive income Gain on Debt
Restructuring
a. P200,000 P -0-
b. P140,000 P -0-
c. P90,000 P 50,000
d. P90,000 P 110,000

8-6 On January 1, 2009, Cain Company purchases at par 500 of the P1,000
face value. 8% bonds of Sisa Corporation a a long-term investment. The
bonds mature on January 1, 2017, and pay interest semiannually on July 1
and January 1. Sisa incurred heavy losses from operations for several years
and defaulted on the July 1, 2012 and January 1, 2013, interest payments.
Because of the permanent decline in the market value of Sisa's bonds. Cain
wrote down its investment to P400,000 on December 21, 2012. Pursuant to
Sisa's plan of reorganization effected on January 1, 2013, Cain received 5,000
shares of P100 pa value, 8% cumulative preferred stock was P70 per share on
January 1, 2013.

What amount of gain (loss) should be included in the determination os Sisa's

net income for 2013?
a. P-0-
b. P50,000
c. P100,000
d. P150,000

8-7 Among the provisions of the recognition of Home Company were the
following.
(1) Issued 1,000 shares of P5 par common stock in exchange for 1,000 shares
of P100 par commn stock outstanding.
(2) Issued 200 shares of P5 par common stock (current fair value P10 a share)
for notes payable to suppliers with unpaidof P2,500 and accrued interestof
P500.
(3) Paid P8,000 to suppliers in full settlement of trade accounts payable of
P10,000.
The total gin on debt discharge recorded by HOme COmpnay is:
a. P4,000
b. P3,000
c. P2,000
d. P1,200

8-8 Troy, Inc. is in seious financial trouble and enters into an agreement with
Gray Company, one its creditors. Troy has a 12% note payable due now to
Gray Company for P100,000 plus P12,000 interest. Under the terms of the
agreement, Gray will receive machinery that cost P60,000 and has a book
value of P34,000 and a fair value of P36,000. Gray agrees toforgive the
accrued interst, reduce the note to P50,000, extend the maturity date for 2
years, and reduce the interest rate to 8% Interest is due at the end of each
year.
The gain on restructuring of debt tobe recognized by the Troy Company in its
boooks is:
a. P18,000
b. P50,000
c. P2,000
d. P44,000

Items 8-9 and 8-11 are based onhe following data:

King Company borrowed P300,000 from the Metro Bank on December 31,
2010. The interest rate was 10%, and interest was due and payable
December 31, of each year. According to the terms of the contract, King was
required to repay the amount borrowed on December 31, 2014. Due to
financial difficulties in 2013, King was not able to pay the accrued interest on
December 31, 2013 ( it had paid the interest in 2011 and 2012 ). King's
debtwas restructured in the following way:
(1) 70% of the December 31, 2013, interest was forgiven.
(2) The interest rate was reduced to 8%.
(3) Principal of the debt wa rduced to P260,000.
(4) The due date for the repayment of the principal was delayed until
December 31, 2015.

8-9 What is the carrying value of King's debt a of December 31, 2013?
a. P260,000
b. P269,000
c. P330,000
d. P300,000

8-10 What is the total of the future cash flows required to liquidate the debt?
a. P290,000
b. P301,000
c. P310,000
d. P260,000

8-11 How much total interest expense will King report on its Income
statement for the years 2012 and 2013?
a. P60,000
b P51,000
c. P41,000
d. -0-

8-12 Good Company, as a result of experiencing finanacial difficultie, had its

debt restructured. According to the restructuring greemen, land owned by
Good will be transferred to the creditor in full settlement of Good's debt which
totaled P300,000. The land originally cost P290,000 and had a fair market
value of P270,000 on the date it was transferred to the creditor. As a result of
tthis debt restructure, Good would report which of the following:
Loss on Transfer of Land Gain on Restructuring of Debt
a. P-0- P10,000
b. P-0- P30,000
c. P20,000 P10,000
d. P20,000 P30,000

8-13 On October 15, 2013, Karla Corporation informed Finnce CO. that Karla
would be unable to reay its P100,000 note due on October 31. Finance Co.
agreed to accept titile to Karla's computer equipment in full settlement of the
note. The equipment' carrying value was P80,000 ad its fair value was
P75,000. Karla's tax rate is 30%.
What amounts should Karla report as the gain ( loss) on the transfer of asset,
and the gain on restructuring of debt?.
Transfer gain (loss) Restructuring gain
a. P(5,000) P25,000
b. P-0- P30,000
c. P-0- P20,000
d. P20,000 P-0-

Item 8-14 and 8-15 are based on the following:

The following data pertains to the transfer ofreal estate pursuant to a
troubled debt restructuring by May Co. to Tanny Corp. in full liquidation of
May's liability to Tanny:
______________________________________________________________________________
Carrying amount of liability liquidated P150,000
Carrying amount of real estate transferred P100,000
Fair value of real estate transferred P90,000
______________________________________________________________________________

8-14 What amount should May report as a gain (Loss) on restructuring of

payables?
a. P60,000
b. -0-
c. P50,000
d. P(10,000)

8-15 What amount should May report as a gain (loss) on transfer of real
estate?
a. P(10,000)
b. -0-
c. P50,000
d. P60,000

8-16 Maria Corp. entered int oa troubled debt restructuring agreement with
Cititbank, Citibank agreed toaccept land with carrying amount of P85,000 and
a fair value of P120,000 in exchange for a note with a carrying amount of
P185,000.
What amount should Maria report as a gain from extinguishment of debt in its
Statement of Comprehensive Income?
a. P65,000
b. P35,000
c. P100,000
d. -0-

8-17 Cora, Inc. is indebted to Pete under P800,000, 10% four-year note dated
December 31, 2010, annual interest of P80,000 was paid on December 31,
2011 and 2012. During 2013, Cora expeienced financia difficulties and is
likely to default unlessconcessions are made. On December 31, 2013, Pete
agrees to restructure te debt as follows:
* Interest of P80,000 for 2013, due December 31, 2013, was made payable
December 31, 2014.* Interest for 2014 was waived.
* The principal amount was reduced to P700,000.
How much should Cara report as a gain in its Statement of Comprehensive
Income for the year ended December 31, 2013?
a. P100,000
b. -0-
c. P60,000
d. P120,000

8-18 On December 31, 2011, Mike Company entered into a debt restructring
agreement with Sure Company, which was experiencing financial difficulties.
Mike restructured a P100,000 note receivable as follows:
*Reduced the principal obligationsssto P70,000.
* Forgave P12,000 of accrued interest.
* Extended the maturity date from December 31, 2011 to Deceber 31, 2013.
* Reduced the interet rate of 12% to 8%. Interest was payable annually on
December 31, 2012 and 2013.
Present value factors:
Single sum, two years @ 8% .85734
Single sum, two years @ 12% .79719
Ordinary annuity, two years @ 8% 1.78326
Ordinary annuity, two years @ 12% 1.69006
In accordance with the agreement, Sure made payments to Mike on
December31, 2012 an 2013. How much interet income should Mike report for
the year ended December 31, 2013?
a. P8,100
b. -0-
c. P5,600
d. P11,200

8-19 Asia Corporation has been experiencing difficulties servicing its long-
term debt which has a curent balance of P620,000 including accrued
interest. Asia is considering two possible alternatives to restructure teh debt.

Alternative #1 would consist of conveying vacant land with a fair value

P350,000 and a book value of P275,000 to the creditor. In addition, Asia
would make two annual payments of P120,000 each.
Alternative #2 would callfor Asia to make five annual payments of P135,000.
All payments are to be made at the end of the respective years.

The market rates of nterest for a 2-year and 5-year note are 10% and 12%
respectively:

1. What isthe effect on net income of Alternative #1 increase (decrease)?

a. P(30,000)
b. P30,000
c. P20,000
d. P(20,000)

2. What is te effect on net income of Alternative #2, increase (decrease)?

a. P(55,000)
b. P55,000
c. P(50,000)
d. P50,000

8-20 For the last several years, Malay Corporation has encountered a
declining market for tis major product lines. Attemptsto diversify have let to
additional disappoinments This unfortunate set of circumstances has left the
company with signifiacant debt and an inability to service its debt. The
existing debt consists of P20,000,000 of pricipal and P875,000 of accrued
interest. Discussions with the creditors have resulted in a proposed
restructuring of debt. The restructuring would consist of the following actions:
a. Exchanging preferred stock with a fair value of P5,100,000 and a par value
of P5,000,000 in exchange for full settlement of P5,500,000of principal debt.
b. Exchanging land with a value of P4,000,000 and book value of P3,000,000
in exchange for P4,500,000 of principal debt.
c. The remaining debt and accrued interest would be repaid over the next 10
years with semi- annual payments due every six months. The annual stated
rate would be 8.5%.

Past operating losses have resulted in a dificit in retained earnings of

P3,400,000. In addition to the deficit, the company's equity includes comon
stock at par value of P6,000,000 and contributed capital in excess of par
value in the amount of P1,000,000.
What is the adjusted retained earnings (deficit) after restructuring?
a. P1,500,000
b. P(1,500,000)
c. P(1,450,000)
d. P1,450,000