Scribd
Upload
35 views3 pages

04 Task Performance 19

The document describes two debt restructuring cases for SEA Corporation and Land Corporation. For SEA Corporation, the document provides journal entries for transactions and adjusting entries. For Land Corporation, the document describes a debt modification where maturity is extended, interest is forgiven, and future interest payments are reduced. It also provides calculations for gain on restructuring and carrying amounts.

Uploaded by

Cristine Manuel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
35 views3 pages

04 Task Performance 19

The document describes two debt restructuring cases for SEA Corporation and Land Corporation. For SEA Corporation, the document provides journal entries for transactions and adjusting entries. For Land Corporation, the document describes a debt modification where maturity is extended, interest is forgiven, and future interest payments are reduced. It also provides calculations for gain on restructuring and carrying amounts.

Uploaded by

Cristine Manuel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

BM20

WORK ON SHEETS!
PART I (PROBLEM-SOLVING)
Determine the requirement for each of the following independent cases. Use a 10-column worksheet for the
solution. (11 items x 5 points)

Case 1: SEA Corporation

The following are the selected 2X17 transactions of SEA Corporation:


Sept. 1 Purchased inventory from Ems Company on account for P50,000. SEA records purchases
gross and uses a periodic inventory system.
Oct. 1 Issued a P50,000, 12-month, 8% note to Ems in payment of the account.
Oct. 1 Borrowed P50,000 from the Shore Bank by signing a 12-month, zero-interest-bearing
P54,000 note.
1. Provide the journal entries for the selected transactions above.
SEPT. 1 purchases P50,000
Accounts Payable P50,000
To record purchased inventory from Ems Company on account
OCT. 1 Accounts Payable P50,000
Notes Payable P50,000
To record Issued a P50,000, 12-month, 8% note to Ems in payment of the account.
OCT.1 Accounts Payable P50,000
Discount on Notes Payable (50,000 x 8%) 4,000
Notes Payable P54,000
To record Issued a P50,000, 12-month, 8% note to Ems in payment of the account.

2. Provide the adjusting entries for December 31.


DEC.31 Interest Expense P1,000
Interest Payable P50,000
To record interest expense
DEC.31 Interest Expense P1,000
Discount on Notes Payable P1,000
Purchased inventory from Ems Company on account

3. What is the total net liability to be reported on December 31 for the interest-bearing note?
Notes Payable P50,000
Interest Payable 1,000
Total net liability (Dec. 31) P51,000
4. What is the total net liability to be reported on December 31 for the zero-interest-bearing note?
Notes Payable P54,000
Discount on Notes Payable (1,000 x 3months) (3,000)
Total net liability (Dec. 31) P51,000

04 Task Performance *Property of


STI
BM20

Case 2: Land Corporation

In 2X19, Land Corporation acquired land by paying P2,000,000 and signing a note with a face value of
P6,000,000. On the note’s due date, December 31, 2X21, Land owed P480,000 of accrued interest and
P6,000,000 on the note. Land was in financial difficulty and was unable to make any payments. To solve the
problem, Land and the bank agreed to amend the note as follows:

 Extended the maturity to December 31, 2X23.


 The P480,000 interest due on December 31, 2X21 was forgiven.
 Land Corporation would be required to make an annual interest payment of P540,000 every
December 31 starting 2X22.
 Transaction cost incurred that is directly related to the debt restructuring was P16,850.

As of December 31, 2X21, the yield rate based on the restructured debt and after considering the amount of
transaction cost is 6.24%.

5. What type of debt restructuring is being described by the case? Modification of Terms
6. What is the total gain from restructuring?
Carrying amount of old liability(6,000,000+480,000) P6,480,000
Present value of new Notes Payable (6, 302,591)
Total Gain from restructuring P177,409
7. What amount should Land Corporation report as gain, before income taxes, in its 2X21 profit or loss?
Present value of new Notes Payable P 6, 302,591.00
(6,155,872.68)
Gain before Income Tax (2X21 profit or loss) P146,718.32
8. What is the carrying amount of the obligation that should be reported in 2X22 statement of financial
position?

Period Interest Paid Interest Expense Discount Carrying Amount 9.


Amortization P

2X21 P6,302,591.00
2X22 P540,000 P393,281.68 P146,718.32 P6,155,872.68
rovide the journal entry for debt restructuring on December 31, 2X21.
DEC.31 Noted Payable- Old P6,000,000
Accrued Interest Payable 480,000
Deferred Cost 177,409
Notes Payable- New P6,177,409
Discount on Notes Payable 480,000

10. Assuming you are the finance manager of Land Corporation, are you in favor of the type of restructuring
that your company and the bank agreed to? Why?
If I were the Finance Manager of Land Corporation, I could say that I like the kind of restructuring that the
company and the bank agreed on because the extension of the maturity date will undoubtedly give the
company a chance to settle its debts. The company would not be required to sell any of its assets or issue any
shares in order to pay its debts in accordance with the agreed-upon debt restructuring. Extra interest is
04 Task Performance *Property of
STI
BM20
ordinary since that is the manner by which business works. The bank extended the maturity date, which the
business should be grateful for.

11. Suppose the owner of Land Corporation wants an alternative to base his decision. Create a debt
restructuring arrangement using the other types of debt restructuring that would give greater benefit to
the company.
I would suggest the Asset swap, in which the company gives the creditor any of their assets to pay off the debt.
Profit or loss is determined by the difference between the consideration paid and the carrying amount of the
financial liability. Sometimes, in order to move forward, we need to give something.

Rubric for grading (Problem-Solving):


PERFORMANCE
Rubric for grading (Short Answer):
CRITERIA PERFORMANCE INDICATORS POINTS
Content Provided pieces of evidence, 3
supporting details, and factual
scenarios
INDICATORS POINTS Organization Expressed the points in clear 2
Correct accounts and amounts used 3 of ideas and logical arrangement of
Computed final amounts are correct/balanced 2 ideas
TOTAL 5 TOTAL 5

04 Task Performance *Property of


STI

You might also like