CPA REVIEW SCHOOL OF THE PHILIPPINES
Manila
FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/SANTOS
MAY 2024 CPALE BATCH 95
DEBT RESTRUCTURE
1. Hull Company is indebted to Apex under a P5,000,000, 12%, three-year note dated December 31, 2022.
Because of Hull’s financial difficulties developing in 2024, Hull Company owed accrued interest of
P600,000 on the note on December 31, 2024. Under a debt restructuring on December 31, 2024, Apex
Company agreed to settle the note and accrued interest for a tract of land having a fair value of
P4,000,000. The carrying amount of the land is P3,600,000.
I. In an asset swap, the difference between the carrying amount of the financial liability and the
consideration given shall be recognized as gain or loss on extinguishment.
II. Under IFRS, the gain on extinguishment should be reported at P2,000,000
III. Under USA GAAP, the gain on restructuring should be reported at P1,600,000
IV. Under USA GAAP, the gain on transfer of land should be reported at P400,000
a. All statements are true
b. All statements are false
c. Only two statements are true
d. Only three statements are true
2. Due to extreme financial difficulties, an entity negotiated a restructuring of a 10%, P5,000,000 note
payable due on December 31, 2024. The unpaid interest on the note on such date is P500,000. The creditor
agreed to reduce the face amount to P4,500,000, forgive the unpaid interest, reduce the interest rate to
8% and extend the due date three years from December 31, 2024. The entity paid P200,000 as
arrangement fee to the creditor.
The market rate of interest is 12%. 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. The PV of 1 at 12% for three periods
is 0.71 and the PV of an ordinary annuity of 1 for three periods is 2.40.
I. There is substantial modification of terms if the gain or loss an modification is at least 10% of the
financial liability
II. The gain an extinguishment of the financial liability should be reported at P1,028,600 for 2024.
III. The interest expense should be reported at P487,080 for 2025.
a. Statements I, II and III are true
b. Statements I, II and III are false
c. Only statements I and II are true
d. Only statements I and III are true
PV of New liability at 10% (4,500,000 x .75) 3,375,000
PV of interest (360,000 x 2.49) 896,400
Total present value at 10% 4,271,400
Old liability (5,000,000 + 500,000) 5,500,000
PV of new liability at 10% 4,271,400
Gain on modification 1,228,600
Arrangement fee ( 200,000)
Net gain on modification 1,028,600
PV of new liability at 12% (4,500,000 x .71) 3,195,000
PV of interest (360,000 x 2.40) 864,000
Total present value at 12% 4,059,000
Old liability 5,500,000
PV of new liability at 12% 4,059,000
Gain an extinguishment 1,441,000
Arrangement fee ( 200,000)
Net gain an extinguishment 1,241,000
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3. An entity is threatened with bankruptcy due to its inability to meet interest payments and fund
requirements to retire P6,000,000 note payable with accrued interest payable of P600,000. The entity has
entered into an agreement with the creditor to exchange equity instruments for the liability.
The terms of the exchange are 300,000 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 note payable is
P5,000,000.
I. In an equity swap, the difference between the old liability and the far value of the shares issued is
recognized a gain or loss on extinguishment.
II. The gain on extinguishment of the note payable is P2,100,000.
a. Statements I and II are true
b. Statements I and II are not true
c. Only statement I is true
d. Only statement II is true
4. Due to adverse economic circumstances and poor management, an entity had negotiated a restructuring
of its 8% P6,000,000 note payable to Second Bank due on December 31, 2024. There is no accrued
interest on the note. The bank has reduced the principal obligation from P6,000,000 to P5,000,000 and
extend the maturity to 3 years on December 31, 2027. However, the new interest rate is 12% payable
annually every December 31. The entity paid P120,000 to the creditor as an arrangement fee.
The new effective rate is 9% after considering the arrangement fee. The present value of 1 at 8% for three
periods is 0.79 and the present value of an ordinary annuity of 1 at 8% for three periods is 2.58.
I. The market rate of interest is ignored if there is no substantial modification of terms.
II. The gain in modification should be reported at P502,000 for 2024.
III. The interest expense is P484,020 for 2025.
IV. The carrying amount of the note payable is P5,262,020 on December 31, 2025.
a. All statements are true
b. All statements are false
c. Only statements I, II and III are true
d. Only statements III and IV are true
PV of new note payable at 8% (5,000,000 x .79) 3,950,000
PV of interest (600,000 x 2.58) 1,548,000
Total present value at 8% 5,498,000
Old liability 6,000,000
PV of new liability at 8% 5,498,000
Gain on modification 502,000
Arrangement fee ( 120,000)
Not gain on modification 382,000
PV of new note payable 5,498,000
Arrangement fee ( 120,000)
Adjusted PV of new note payable 5,378,000
Face amount of new note payable 5,000,000
Premium on new note payable 378,000
End
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