Lobrigas, Claudine L.

BSIA-IV

Intermediate Accounting 2

Directions: Read and analyze problem. Answer what is asked and provide solutions. No
merit shall be given for answers without solutions. Encode your answer in a separate word file
and submit in the classwork section of our google class on or before the date as reflected in
your study schedule. Please follow the format in naming the file for submission.
Lastname_Unit4_Topic2_Assessment

Problem #1:

Rainbow Company showed the following balances on December 31, 2021:

Note payable – due December 31, 2021 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

Notes payable 1,000,000

Accrued interest payable 200,000

Patent 600,000

Gain on extinguishing of debt 600,000

Notes payable 1,000,000

Accrued interest payable 200,000

Total liability 1,200,000

Less: carrying amount of patent 600,000

 Gain on extinguishing of debt 600,000

2. Under USA GAAP

Notes payable 1,000,000

Accrued interest payable 200,000

Patent 600,000

Gain on exchange 500,000

Gain on Debt restructuring 100,000

Fair value of patent 1,100,000

Less: carrying amount of patent 600,000

Gain on exchange 500,000

Notes payable 1,000,000

Accrued interest payable 200,000

Total liability 1,200,000

Less: fair value of patent 1,100,000

Gain on restructuring debt 100,000

Problem #2:

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 a 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 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 used for the equity swap.

Bonds payable 5,000,00

0
Accrued interest payable
500,000
Share capital 3,500,000

Share premium 1,050,000

Gain on extinguishing debt 950,000

Fair value of shares issued (35,000 x 130) 4,550,000

Less: Par value of shares issued (35,000 x 100) 3,500,000

Share premium 1,050,000

Bonds payable 5,000,000

Accrued interest payable 500,000

Carrying amount of bonds payable 5,500,000

Less: Fair valye of shares issued 4,550,000

Gain on extinguishing of debt 950,000

2. If the fair value of the liability is used for the equity swap.

Bonds payable 5,000,000

Accrued interest payable 500,000

Share capital 3,500,000

Share premium 1,200,000

Gain on extinguishing debt 800,000

Fair value of shares issued 4,700,000

Less: Par value of shares issued (35,000 x 100) 3,500,000

Share premium 1,200,000

Bonds payable 5,000,000

Accrued interest payable 500,000

Carrying amount of bonds payable 5,500,000

Less: Fair valye of shares issued 4,700,000

Gain on extinguishing of debt 800,000

3. If the carrying amount of the liability is used for the equity swap.

Bonds payable 5,000,000

Accrued interest payable 500,000

Share capital 3,500,000

Share premium 2,000,000

Bonds payable 5,000,000

Accrued interest payable 500,000

Carrying amount of bonds payable 5,500,000

 Less: Fair valye of shares issued 3,500,000

Gain on extinguishing of debt 2,000,000

Problem #3:

On January 1, 2021, Granada Company had an overdue 10% note payable to First Bank at
P8,000,000 and accrued interest of P800,000. As a result of a restructuring on January 1, 2021,
First Bank agreed 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, 2024.

• Annual interest of 12% is to be paid for 4 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 the new note payable on January 1, 2021?

a. 6,380,400

b. 6,000,000

c. 4,098,000

d. 5,464,000

PV of principal (6,000,000 x 0.683) 4,098,000

PV of interest payment (6,000,000 x 12% = 720,000 x 3.17) 2,282,400

Present value of new note payable 6,380,400

2. What is the gain on extinguishment of debt to be recognized for 2021?

a. 2,000,000

b. 2,800,000

c. 2,419,600
 d. 1,619,600

Notes payable - old 8,000,000

Accrued interest payable 800,000

Carrying amount of liability 8,800,000

Less: PV of new note payable 6,380,400

Gain on extinguishing of debt 2,419,600

3. What is the interest expense to be recognized for 2021?

a. 720,000

b. 800,000

c. 600,000

d. 638,040

Interest expense (6,380,400 x 10%) = 638,040

Problem #4:

Due to adverse economic circumstances and poor management, Tagaytay Highlands Company
had negotiated a restructuring of a 9% P6,000,000 note payable to Second Bank due on January
1, 2021. There was no accrued interest on the note on January 1, 2021.

The bank reduced the principal obligation from P6,000,000 to P5,000,000 and extended the
maturity to three years on December 31, 2023. 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, 2021?

a. 6,000,000

b. 5,000,000

c. 5,494,500
 d. 3,850,000

PV of principal (5,000,000 x 0.77) 3,850,000

PV of interest payment (5,000,000 x 13% = 650,000 x 2.53) 2,664,500

Present value of new note payable 5,494,500

2. What is the gain on extinguishment of debt to be recognized for 2021?

a. 500,000

b. 350,000

c. 505,500

d. 0

Gain on extinguishing of debt can not be recognized because it is less than 10% of
carrying amount of old liability of 6,000,000 therefor it is 0.

3. What is the interest expense for 2021 as a result of the modification?

a. 650,000

b. 450,000

c. 494,505

d. 540,000

Interest expense (5,494,500 x 9%) = 494,505