Financial liabilities include

Bank overdraft.
Loans receivable.
Income tax payable.C
umulative, redeemable preference shares at the option of the issuer.
Ans.
Bank overdraft.

Davao Corp.’s accounts payable at December 31, 20Y1, totaled P800,000 before
any necessary year-end adjustments relating to the following transactions:
· On December 27, 20Y1, Davao Corp. wrote and recorded checks
to creditors totaling P350,000 causing an overdraft of P100,000 in Davao
Corp.’s bank account at December 31, 2016. The checks were mailed on
January 10, 20Y2.
· On December 28, 20Y1, Davao Corp. purchased and received
goods for P200,000, terms 2/10, n/30. Davao Corp. records purchases and
accounts payable at net amounts. The invoice was recorded and paid
January 3, 20Y2.
· Goods shipped FOB destination on December 20, 20Y1 from a
vendor to Davao Corp were received January 2, 20Y2. The invoice cost was
P65,000.

At December 31, 20Y1, what amount should Davao Corp report as total accounts
payable?
Select one:

P1,246,000
P1,281,000
P1,096,000
P1,346,000
Ans.
P1,346,000

IAS 39 was felt to work well as regards the accounting for financial liabilities; therefore the
IASB felt that there was little need for change. As a result of the lack of change in IFRS 9, how
are most financial liabilities likely to be measured?

Amortised cost
Net realisable value
FVTPL
FVTOCI
Ans.
Amortised cost
Company A, a listed company, has an obligation to deliver to Company B as many of company
A’s own ordinary shares as will equal P1,000,000. Company A’s financial instrument will be
classified as

Financial asset.
Financial liability.
Equity instrument.
Compound financial instrument.
Ans.
Financial liability.

R is preparing its financial statements for the year ended December 31, 2006. Accounts
payable amounted to P360,000 before any necessary year-end adjustment related to the
following:
a. At December 31, 2006, R has a P50,000 debit balance in its account payable to C,
a supplier, resulting from a P50,000 advance payment for goods to be
manufactured to R’s specifications.
b. Checks in the amount of P100,000 were written to vendors and recorded on
December 29, 2006. The checks were mailed on January 5, 2007.

R should report as accounts payable in its December 31, 2006 balance sheet?

P 510,000
P 410,000
P 310,000
P 210,000
Ans.
P 510,000

Macar Corporation had accounts payable of P5,000,000 recorded in the general ledger
as of December 31, 2016 before consideration of the following unrecorded
transactions:
Invoice Date Date
date Amount shipped received FOB terms
1-3-17 P400,000 12-22-16 12-24-16 Destination
Shipping
1-2-17 650,000 12-28-16 1-2-17
point
12-26- Shipping
600,000 1-2-17 1-3-17
16 point
1-10-17 450,000 12-31-16 1-5-17 Destination

In the December 31, 2016 statement of financial position, the accounts payable should be
reported in the amount of

P5,000,000
P6,050,000
P5,400,000
P7,100,000
Ans.
P6,050,000

Math Inc. signed a P200,000 noninterest-bearing note due in five years from a
production company eager to do business. Comparable borrowings have carried an
11% interest rate. At what amount should this debt be carried at its inception?

P178,000
P200,000
P222,000
P118,690
Ans.
P118,690

On December 31, 2013, Quirino Company purchased equipment from Ott Corp. and
issued a noninterest-bearing note requiring payment of P50,000 annually for ten
years. The first payment is due December 31, 2013, and the prevailing rate of interest
for this type of note at date of issuance is 12%. Present value factors are as follows:

Present value of 1 at 12% for 10 periods 0.3220

Present value of ordinary annuity of 1 at 12% 5.6502
for 10 periods
Present value of annuity due of 1 at 12% for 6.3282
10 periods

The interest expense to be reported by Park in its 2014 income statement is

P37,969
P30,301
P31,969
P27,901
Ans.
P31,969

On December 30, 2016, Jeepney, Inc. purchased a machine from Abiss Corp. in
exchange for a noninterest-bearing note requiring eight payments of P20,000. The
first payment was made on December 30, 2016, and the others are due annually on
December 30. At date of issuance, the prevailing rate of interest for this type of note
was 11%. Present value factors are as follows:
Present value of Present value of
Periods ordinary annuity of annuity in advance
 1 at 11% of 1 at 11%
7 4.712 5.231
8 5.146 5.712

On Jeepney’s December 31, 2016 statement of financial position, the note payable to Abiss was

P 94,240
P104,620
P102,920
P114,240
Ans.
P 94,240

PonyTail Corp. has an outstanding 10% note payable dated October 1, 2011 and is
payable in three equal annual payments of P600,000 plus interest. The first interest
and principal payment was made on October 1, 2012. In PonyTail 's June 30, 2013
statement of financial position, what amount should be reported as accrued interest
payable for this note?

35,000
90,000
45,000
P30,000
Ans.
90,000

Math Inc. signed a P200,000 noninterest-bearing note due in five years from a
production company eager to do business. Comparable borrowings have carried an
11% interest rate. At what amount should this debt be carried at its inception?

P200,000
P118,690
P178,000
P222,000
Ans.
P118,690

Due to adverse economic circumstances and poor management, Zubic Company has
negotiated a restructuring of its P5,000,000 note payable to Valley Bank. Valley Bank
has agreed to reduce the face value of the note from P5,000,000 to P4,000,000, reduce the
interest rate from 15% to 10%, and extend the due date three years from the date of
restructuring. The restructuring will occur on December 31, 2013, the last day of Zubic’s
annual reporting period. The unpaid interest on the restructured loan at this time is
P750,000 which is forgiven. The tax rate is 35%. (Round off present value factors to
four decimal places)

How much is the interest expense in 2014?

P400,000
P399,996
P531,492
P354,328
Ans.
P531,492

On August 1, 2013 Sampaloc Corp.’s P2,000,000, one-year non-interest-bearing note

due July 31, 2013, was discounted at Manila Bank at 10.8%. Sampaloc uses the
straight-line method of amortizing discount. What amount should Sampaloc report for
notes payable in its December 31, 2013 statement of financial positi P1,200,000 on?

P2,000,000
P1,874,000
P1,910,000
P1,200,000
Ans.
P1,874,000

Silver Company purchased merchandise for resale on January 1, 2013, for P5,000 cash
plus a P20,000, two-year note payable. The principal is due on December 31, 2014.
The note specified 8 percent interest payable each December 31. Silver's going rate
of interest for this type of debt was 15 percent. How much is the carrying amount of
the note payable on December 31, 2013?

P20,000
P19,142
P18,781
P17,724
Ans.
P18,781

Onshing Industries purchases new specialized manufacturing equipment on July 1,

2012. The equipment cash price is P79,000. Onshing signs a deferred payment contract
that provides for a down payment of P10,000 and an 8-year note for P103,472. The note
is to be paid in 8 equal annual payments of P12,934. The payments include 10% interest
and are made on June 30 of each year, beginning June 30, 2013.
The carrying amount of the note payable on December 31, 2013 is

P62,966
P66,115
P56,329
P59,818
Ans.
P66,115

On September 1, 2012, Nagtahan Co. borrowed on a P1,350,000 note payable from Dilly
Bank. The note bears interest at 12% and is payable in three equal annual principal
payments of P450,000. On this date, the bank’s prime rate was 11%. The first annual
payment for interest and principal was made on September 1, 2013. At December 31,
2013, what amount should Nagtahan report as accrued interest payable.

P49,500
P54,000
P33,000
P36,000
Ans.
P36,000

Onshing Industries purchases new specialized manufacturing equipment on July 1, 2012.

The equipment cash price is P79,000. Onshing signs a deferred payment contract that
provides for a down payment of P10,000 and an 8-year note for P103,472. The note is to
be paid in 8 equal annual payments of P12,934. The payments include 10% interest and
are made on June 30 of each year, beginning June 30, 2013.

The total interest expense for the year ended December 31, 2013 is

P6,900
P6,612
P6,599
P5,982
Ans.
P6,599

notes payable - recognition and measurement - Q9604 - Q9638

On January 1, 20Y1, Benham Company issued 10% bonds in the face amount of
P5,000,000 that mature on December 31, 20Y10. The bonds were issued for
P4,430,000 to yield 12%, resulting in bond discount of P570,000. The entity used
 the interest method of amortizing bond discount. Interest is payable on June 30
and December 31. What is the interest expense for 20Y1?

600,000
532,548
500,000
531,600
Ans.
532,548

On January 1, 20Y1, Benham Company issued 10% bonds in the face amount of
P5,000,000 that mature on December 31, 20Y10. The bonds were issued for
P4,430,000 to yield 12%, resulting in bond discount of P570,000. The entity used
the interest method of amortizing bond discount. Interest is payable on June 30
and December 31. What is the carrying amount of the bonds payable at December
31, 20Y1?

4,461,600
4,445,800
5,000,000
4,462,548
Ans.
4,462,548

On January 1, 20CY, Tudor Company issued its 10%, 5-year convertible debt
instrument with a face amount of P10,000,000 for P10,000,000. Interest is payable
every December 31 of each year. The debt instrument is convertible into 90,000
ordinary shares with a par value of P100. When the debt instruments were issued,
they were selling at 97% without conversion option. Tudor Company incurred
P80,000 transaction costs on the issue of the debt instruments.

How much of the net proceeds represent the debt component?

P 9,622,400
P 9,920,000
P 297,600
P10,000,000
Ans.
P 9,622,400

On June 30, 2014, Jerome Company issued at 99, five thousand of its 8%, P1,000 face value
bonds. The bonds were issued through an underwriter to whom Jerome paid bond issue cost of
P425,000. On June 30, 2014, Jerome should report the bond liability at

4,525,000
4,950,000
5,000,000
4,575,000
Ans.
4,525,000

Pulilio Company’s December 31, 2013 statement of financial position contained the
following items in the long-term liabilities section:

10% registered bonds, callable in 2014, due

2016, secured by machinery P3,000,000
11% bonds, convertible into ordinary
shares beginning in 2014, due in 2018, 5,000,000
secured by realty
12% collateral trust bonds (P500,000 7,000,000
maturing annually)

What is the total amount of Pulilio’s term bonds and debenture bonds, respectively?

P15,000,000 and P15,000,000

P 8,000,000 and P 7,000,000
P 8,000,000 and P 0
P 0 and P 7,000,000
Ans.
P 8,000,000 and P 0

On January 1, 2016, Watch Company issued 3-year bonds with face value of P5,000,000 at 99.
The nominal rate is 10% and the interest is payable annually on December 31. Additionally, the
entity aid bond issue cost of P150,000. What is the interest expense for 2016 using the effective
interest method?

550,000
576,000
528,000
559,680
Ans.
559,680

On January 1, 2011 Lassie Company issued a 5-year, 10% convertible bond with a
face amount of P1,000,000. The bonds were issued for P995,002. Transaction costs
were likewise incurred amounting to P18,260. The fair value of a similar instrument
with no conversion feature is quoted at P945,252 which was effectively at 11.5%.
Interest expense for 2011
100,000
108,704
111,348
114,425
Ans.
108,704

On January 1, 2016, Philippines Company received P1,077,200 for P1,000,000 face

amount 12% bonds. The bonds were sold to yield 10%. Interest is payable semiannually
every January 1 and July 1. The entity has elected the fair value option for valuing
financial liabilities. On December 31, 2016, the fair value of the bonds is determined to
be P1,064,600. On the basis above, compute for the following:

1) Carrying amount – 1/1/16

2) Interest expense – 2016

3) Gain from change in fair value – 2016

4) Carrying amount – 12/31/16

1) 1,000,000 2) 100,000 3) 64,600 gain 4) 1,077,200

1) 1,077,200 2) 120,000 3) 12,600 gain 4) 1,064,600
1) 500,000 2) 107,720 3) 12,600 loss 4) 1,000,000
1) 538,600 2) 129,264 3) 64,600 loss 4) 1,064,920
Ans.
1) 1,077,200 2) 120,000 3) 12,600 gain 4) 1,064,600

Bass Company issued 2,000 convertible bonds on January 1, 2011. The bonds have a
three-year term and are issued at 110 with a face value of P1,000 each. Interest is
payable annually in arrears at a nominal 6% interest rate. Each bond is convertible at
anytime up to maturity into 100 ordinary shares with a par value of P5. The
prevailing rate for a similar debt instrument without any conversion option at the time
of issuance is 9%

The present value of P1 @ 9% for three periods is 0.77 and the present value of an
ordinary annuity at 9% for three periods is 2.53

The equity component of the issuance is

356, 400
0
1,000,000,000
5,000,000
Ans.
356, 400

On January 1, 2016, NinePM Company issued its 10%, 5-year convertible debt instrument
with a face amount of P10,000,000 for P10,000,000. Interest is payable every December
31 of each year. The debt instrument is convertible into 90,000 ordinary shares with par
value of P100. When the debt instrument was issued, they were selling at 97% without
conversion option. NinePM Company incurred P80,000 transaction costs on the issue of
the debt instruments. How much of the net proceeds represent the equity component?

P 297,600
P 9,622,400
P 9,920,000
P10,000,000
Ans.
P 297,600

Which statement is incorrect regarding convertible bonds?

The proceeds from issuance of convertible bonds must be allocated to the liability and equity
components pro rata based on fair values.

The equity component is not remeasured until the bond is either converted or redeemed.

If the bond is converted, the remaining liability component is transferred to equity.

If the bond is not converted, the equity component remains in equity despite redemption.
Ans.
The proceeds from issuance of convertible bonds must be allocated to the liability and equity
components pro rata based on fair values.

An entity issues 2,000 convertible bonds at the beginning on January 1, 20CY.

The bonds have a three-year term, and are issued at par with a face value of P1,000
per bond. Interest is payable annually in arrears at a nominal annual interest rate
of 6 percent. Each bond is convertible at any time up to maturity into 250
ordinary shares. The entity has an option to settle the principal amount of the
convertible bonds in ordinary shares or in cash. When the bonds are issued, the
prevailing market interest rate for similar debt without a conversion option is 9
percent. At the issue date, the market price of one ordinary share is P3. The
issuance of convertible bonds increased the entity’s equity by
P0
P896,025
P134,872
P151,878
Ans.
P151,878

On January 1, 20CY, Entity A issues convertible bonds with a maturity of five years. The issue is
for a total of 1,000 convertible bonds. Each bond has a par value of P1,000, a stated interest rate
is 5% per year, and is convertible into 5 ordinary shares of Entity A. The convertible bonds were
issued to Entity O at par. The per-share price for an Entity A share is P15. Quotes for similar
bonds issued by Entity A without a conversion option (i.e., bonds with similar principal and
interest cash flows) suggest that they can be sold for P900,000.

The carrying amount of bonds payable on Entity A’s books as of December 31, 20CY is

P1,000,000
P 917,320
P882,680
P938,085
Ans.
P 917,320

On January 1, 2014, Icar Company issued convertible bonds with a face value of
P5,000,000 for P6,000,000. The bonds are convertible into 50,000 shares with P100 par
value. the bonds have a 5-year life with 10% stated interest rate payable annually every
December 31. The fair value of the convertible bonds without conversion option is
computed at P5,399,300 n January 1, 2014. On December 31, 2016, the convertible bonds
were not fully converted but fully paid for P5,550,000. On such date, the fair value of the
bonds without conversion privilege is P5,400,000 and the carrying amount is P5,178,300.
What is the loss on the extinguishment of the convertible bonds on December 31, 2016?

221,700
150,000
371,700
0
Ans.
221,700

Company A issues 2,000 convertible notes on July 1, 2005. The notes have a three-year term and
are issued at par. The notes pay interest at 12% annually in arrears. The holder of each note is
entitled to convert the note into 250 ordinary shares of Company A at any time up to maturity.
Company A’s financial instrument will be classified as
Financial asset.
Financial liability.
Equity instrument.
Compound financial instrument.
Ans.
Compound financial instrument.

On 1 January 2Y01, Entity A issued a 10 per cent convertible debenture with a face value of
P1,000,000 maturing on 31 December 2Y10. The debenture is convertible into ordinary
shares of Entity A at a conversion price of P25 per share. Interest is payable half-yearly in
cash. At the date of issue, Entity A could have issued nonconvertible debt with a ten-year
term bearing a coupon interest rate of 11 per cent.

On 1 January 2Y06, to induce the holder to convert the convertible debenture promptly,
Entity A reduces the conversion price to P20 if the debenture is converted before 1 March
2Y06 (ie within 60 days). The market price of Entity A’s ordinary shares on the date the
terms are amended is P40 per share.

Compute the amount to be recognized in profit or loss as a result of the amendment of the
terms.

P400,000
P200,000
P50,000
P 0
Ans.
P400,000

Under IAS 39, is a derivative (e.g., an equity conversion option) that is embedded in another
con tract (e.g., a convertible bond) accounted for separately from that other contract?

Yes. IAS 39 requires all derivatives (both freestanding and embedded) to be accounted for as
derivatives.

No. IAS 39 precludes entities from splitting financial instruments and accounting for
the components separately

It depends. IAS 39 requires embedded derivatives to be accounted for separately as

derivatives if, and only if, the entity has embedded the derivative in order to avoid derivatives
accounting and has no substantive
business purpose for embedding the derivative

It depends. IAS 39 requires embedded derivatives to be accounted for separately if, and only if,
the economic characteristics and risks of the embedded derivative and the host contract are not
closely related and the combined contract is not measured at fair value with changes in fair value
recognized in profit or loss.
Ans.
It depends. IAS 39 requires embedded derivatives to be accounted for separately if, and only if,
the economic characteristics and risks of the embedded derivative and the host contract are not
closely related and the combined contract is not measured at fair value with changes in fair value
recognized in profit or loss.

On December 31, 20CY, Atimonan Company issued 8,000 of its 8%, 10-year P1,000 face value
bonds with detachable share warrants at 120. Each bond carried a detachable warrant for two
shares of Atimonan’s P100 par value ordinary shares at a specified option price of P150.
Immediately after issuance, the market value of the bonds ex-warrants was P8,100,000 and the
market value of the warrants was P900,000. The issuance of the bonds increased Atimonan’s
equity by

P 900,000
P1,500,000
P960,000
P0
Ans.
P1,500,000

On January 1, 2014, Icar Company issued convertible bonds with a face value of
P5,000,000 for P6,000,000. The bonds are convertible into 50,000 shares with P100 par
value. the bonds have a 5-year life with 10% stated interest rate payable annually every
December 31. The fair value of the convertible bonds without conversion option is
computed at P5,399,300 n January 1, 2014. On December 31, 2016, the convertible bonds
were not fully converted but fully paid for P5,550,000. On such date, the fair value of the
bonds without conversion privilege is P5,400,000 and the carrying amount is P5,178,300.
What is the loss on the extinguishment of the convertible bonds on December 31, 2016?

221,700
150,000
371,700
0
Ans.
221,700

On January 1, 20Y1, Jumbo Corporation issued a P3 million 6% convertible bonds at

par. The bonds are redeemable at a premium of 10% on December 31, 20Y4 or it may be
converted into ordinary shares on the basis of 50 shares for each P1,000 bond at the
option of the holder. The interest rate for an equivalent bond without the conversion
rights would have been 10%. (Round-off present value factors to four decimal places)

The issuance of convertible bonds on January 1, 20Y1 increased the entity’s equity by
P175,518
P 73,068
P380,418
P0
Ans.
P380,418

January 1, 20CY, Entity A issues convertible bonds with a maturity of five years. The issue is for
a total of 1,000 convertible bonds. Each bond has a par value of P1,000, a stated interest rate is
5% per year, and is convertible into 5 ordinary shares of Entity A. The convertible bonds were
issued to Entity O at par. The per-share price for an Entity A share is P15. Quotes for similar
bonds issued by Entity A without a conversion option (i.e., bonds with similar principal and
interest cash flows) suggest that they can be sold for P900,000.

The issuance of convertible bonds increased Entity A’s equity by

P75,000
P76,923
P100,000
P0
Ans.
P100,000

In a debt restructuring that is considered an asset swap, the gain on extinguishment is equal to
the

Excess of the fair value of the asset over its carrying amount.
Excess of the carrying amount of the debt over the fair value of the asset.
Excess of the fair value of the asset over the carrying amount of the debt.
Excess of the carrying amount of the debt over the carrying amount of the asset.
Ans.
Excess of the carrying amount of the debt over the carrying amount of the asset.

Sun Company, after having experienced financial difficulties in 2012, negotiated with
a major creditor and arrived at an agreement to restructure its loan on December 31,
2012. Principal loan balance is P7,200,000 interest of P800,000. The creditor
accepted an equipment with a fair value of P1,400,000 and a note receivable from Sun
Company’s customer with a carrying amount of P5,400,000. The equipment’s original
cost was P1,800,000 and its related depreciation was P600,000.
The amount of gain recognized arising from the debt restructuring by way of an “asset
swap” is

0
800,000
1,200,000
1,400,000
Ans.
1,400,000

Island Company owes P2, 000, 000 plus P180,000 of accrued interests to First State
Bank. The debt is a 10-year, 10% notes. During 20Y1, Island’s business deteriorated due
to a faltering regional economy. On December 31, 20Y4, First State Bank agrees to
accept an old machine and cancel the entire debt. The machine has a cost of P3,900,000,
accumulated depreciation of P2, 210,000, and a fair market value of P1, 900,000.

How much should Island Company recognize as a finance income in its profit or loss as a
result of the financial liability derecognition?
Select one:

P280, 000
P210, 000
P310, 000
P490, 000
Ans.
P490, 000

Misamis Company is indebted to Occidental Company under a P5,000,000, 10% three-

year note dated December 31, 20Y1. Because of financial difficulties, Misamis owed
accrued interest of P500,000 on the note at December 31, 20Y1 Under a debt
restructuring on December 31, 20Y4, Occidental Company agreed to settle the note and
accrued interest for a tract of land having a fair value of P3,500,000. The acquisition cost
of the land is P1,000,000. The income tax rate is 35%. In its 20Y4 income statement
Misamis should report gain on extinguishment of debt at
Select one:

P2,000,000
P4,500,000
P2,925,000
P2,500,000
Ans.
P4,500,000

On December 31, 2016, Kotse Co. is in financial difficulty and cannot pay a note due that day. It
is a 600,000 note with 60,000 accrued interest payable to Piper, Inc. Piper agrees to accept from
Kotse a building that has a fair value of 590,000, an original cost of 530,000, and accumulated
depreciation of 130,000. Kotse should recognize a gain on the settlement of the debt of

0
10,000
60,000
260,000
Ans.
260,000

Misamis Company is indebted to Occidental Company under a P5,000,000, 10%

three-year note dated December 31, 20Y1. Because of financial difficulties,
Misamis owed accrued interest of P500,000 on the note at December 31, 20Y1
Under a debt restructuring on December 31, 20Y4, Occidental Company agreed to
settle the note and accrued interest for a tract of land having a fair value of
P3,500,000. The acquisition cost of the land is P1,000,000. The income tax rate
is 35%. In its 20Y4 income statement Misamis should report gain on
extinguishment of debt at

P2,000,000
P4,500,000
P2,925,000
P2,500,000
Ans.
P4,500,000

debt restructuring - asset swap - Q9609 - Q9643

Island Company owes P2, 000, 000 plus P180,000 of accrued interests to First
State Bank. The debt is a 10-year, 10% notes. During 20Y1, Island’s business
deteriorated due to a faltering regional economy. On December 31, 20Y4, First
State Bank agrees to accept an old machine and cancel the entire debt. The
machine has a cost of P3,900,000, accumulated depreciation of P2, 210,000, and a
fair market value of P1, 900,000.

How much should Island Company recognize as a finance income in its profit or loss as a
result of the financial liability derecognition?

P280, 000
P210, 000
P310, 000
P490, 000
Ans.
P490, 000

Jeffrey Company is indebted to Apex under a P5,000,000, 12% three-year note date December
31, 2012. Because of Jeffrey’s financial difficulties developing in 2014, Jeffrey owed accrued
interest of P600,000 on the note at December 31, 2014. Under a debt restructuring on December
31, 2014, Apex agreed to settle the note and accrued interest for a tract of land having a fair
value of P4,500,000. Jeffrey’s acquisition cost of the land is P3,600,000. Ignoring income tax in
its 2014 income statement, what amount of gain on extinguishment should Jeffrey report as
component of income from continuing operations?
2,000,000
1,400,000
1,100,000
900,000
Ans.
2,000,000

Moon Company is experiencing financial difficulty and is negotiating a debt

restructuring with its creditor. Moon Company has an outstanding financial liability
of P5,000,000.

Stars Financing Company accepted an equity interest in Moon Company in the form
of 500,000, P9 par value ordinary shares which at the time of restructuring was quoted
at P9.80 per share. The fair value of the obligation at the time of the restructuring was
P4,800,000

The amount of gain to be recognized arising from the debt restructuring by way of an
“equity swap” is

0
100,000
200,000
500,000
Ans.
100,000

On December 31, 20CY, X Corp. was indebted to Zyland Co. on a P1,000,000, 10%
note. Only interest had been paid to date, and the remaining life of the note was 2
years. Because X Corp. was in financial difficulties, the parties agreed that X Corp.
would settle the debt on the following terms:
 Settle one-half of the note by transferring land with a recorded value of P400,000
and a fair value of P450,000.
 Settle one-fourth of the note by transferring 10,000, P1 par, ordinary shares with a
fair market value of P15 per share.
 Modify the terms of the remaining one-fourth of the note by reducing the interest
rate to 5% for the remaining 2 years and reducing the principal to P150,000.

What total gains should X Corp. record in 20CY from this troubled debt restructuring?

P135,000
P200,000
P213,024
P0
Ans.
P213,024
On December 31, 20Y1, Merciful Bank entered into a debt restructuring agreement with
Miserable Corp., which was experiencing financial difficulties. A note for P1,000,000
and one year's accrued interest was due on this date from Miserable. The note receivable
from Miserable was restructured as follows:
 reduced the principal obligation to P700,000.
 forgave the P120,000 of accrued interest for 20Y1.
 extended the maturity date to December 31, 20Y4.
 reduced the interest rate to 8%.

Interest is payable annually on December 31, beginning 20Y2. In accordance with the
agreement, Miserable made payments to Merciful Bank on December 31, 20Y2, 20Y3 and
20Y4. (Round off present value factors to four decimal places)

The gain on extinguishment of debt to be recognized in Miserable’s 2008 profit or loss is

P477,422
P420,000
P487,239
P0
Ans.
P487,239

Due to adverse economic circumstances and poor management, Library Company had negotiated
a restructuring of its 9% P6,000,000 note payable to Banco de Oro due on January 1, 2016. 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, 2018. However, the new
interest rate is 13% payable annually every December 31. The present value of 1 at 9% for three
periods is 0.77 and the present value of an ordinary annuity of 1 at 9% for three periods is 2.53.
What is the gain on extinguishment of debt to be recognized for 2016?

1,000,000
505,500
350,000
0
Ans.
0

Due to adverse economic circumstances and poor management, Sultan Company has negotiated a
restructuring of its P10,000,000 note payable to Kudarat Bank. Kudarat Bank has agreed to
reduce the face value of the note to P8,000,000 and extend the due date three years from the date
of restructuring. However, the interest rate was increased from 15% to 21%. The restructuring
will occur on December 31, 20CY. There is no unpaid interest on the restructured loan at this
time. The tax rate is 35%. How much is the gain on extinguishment of debt for the year 20CY?
(Round off present value factors to four decimal places)
P2,000,000
P1,999,848
P904,224
P0
Ans.
P904,224

Due to adverse economic circumstances and poor management, Depressed Company has
negotiated a restructuring of its P5,000,000 note payable to Benevolent Bank.
Benevolent Bank has agreed to reduce the face value of the note to P4,000,000 and
extend the due date three years from the date of restructuring. However, the interest rate
was increased from 15% to 21%. The restructuring will occur on December 31, 20Y1.
There is no unpaid interest on the restructured loan at this time. The tax rate is 35%.
(Round off present value factors to four decimal places)

How much is the carrying amount of the note on December 31, 20Y2?
P4,000,000P4,700,500P4,705,705P4,910,000Due to adverse economic circumstances and
poor management, Depressed Company has negotiated a restructuring of its P5,000,000
note payable to Benevolent Bank. Benevolent Bank has agreed to reduce the face value
of the note to P4,000,000 and extend the due date three years from the date of
restructuring. However, the interest rate was increased from 15% to 21%. The
restructuring will occur on December 31, 20Y1. There is no unpaid interest on the
restructured loan at this time. The tax rate is 35%. (Round off present value factors to
four decimal places)

How much is the carrying amount of the note on December 31, 20Y2?

P4,000,000
P4,700,500
P4,705,705
P4,910,000
Ans.
P4,700,500

Due to adverse economic circumstances and poor management, Compostela Company has
negotiated a restructuring of its P5,000,000 note payable to Valley Bank. Valley Bank has agreed
to reduce the face value of the note from P5,000,000 to P4,000,000, reduce the interest rate from
15% to 10%, and extend the due date three years from the date of restructuring. The
restructuring will occur on December 31, 20Y1, the last day of Compostela’s annual reporting
period. The unpaid interest on the restructured loan at this time is P750,000 which is forgiven.
The tax rate is 35%. ( Round off present value factors to four decimal places)
How much is the interest expense in 20Y2?

P400,000
P531,492
P399,996
P354,328
Ans.
P531,492

On December 31, 20Y1, Merciful Bank entered into a debt restructuring agreement with
Miserable Corp., which was experiencing financial difficulties. A note for P1,000,000
and one year's accrued interest was due on this date from Miserable. The note receivable
from Miserable was restructured as follows:
 reduced the principal obligation to P700,000.
 forgave the P120,000 of accrued interest for 20Y1.
 extended the maturity date to December 31, 20Y4.
 reduced the interest rate to 8%.

Interest is payable annually on December 31, beginning 20Y2. In accordance with the
agreement, Miserable made payments to Merciful Bank on December 31, 20Y2, 20Y3 and
20Y4. (Round off present value factors to four decimal places)

How much interest expense should Miserable report for the year ended December 31,
20Y2?

P75,931
P64,258
P56,000
P0
Ans.
P75,931

Due to extreme financial difficulties Cloud Company negotiated to restructure its

10%, P5,000,000 note obligation maturing on December 31, 2010. The following
modifications are to be applied in relation to the debt restructuring agreement as
approved by Nimbus Financing.

 Waiver of the unpaid interest amounting to P500,000

 Reduction of the principal amount to P4,000,000
 Reduction of the original interest rate to 8%
 Extension of the due date three years from December 31, 2010

Present value of P1 @ 10% for three periods is 0.75;

Present value of an ordinary annuity of P1 @ 10% for three periods 2.49
 The amount of gain to be recognized arising from the debt restructuring by way of
a “modification of terms” is

0
1,203,200
1,500,000
1,703,200
Ans.
1,703,200

Due to adverse economic circumstances and poor management, Depressed Company has
negotiated a restructuring of its P5,000,000 note payable to Benevolent Bank.
Benevolent Bank has agreed to reduce the face value of the note to P4,000,000 and
extend the due date three years from the date of restructuring. However, the interest rate
was increased from 15% to 21%. The restructuring will occur on December 31, 20Y1.
There is no unpaid interest on the restructured loan at this time. The tax rate is 35%.
(Round off present value factors to four decimal places)

The gain on extinguishment of debt to be recognized in Depressed Company’s 20Y1

profit or loss is

P1,000,000
P 627,924
P452,112
P0
Ans.
P452,112

Due to adverse economic circumstances and poor management, Compostela Company has
negotiated a restructuring of its P5,000,000 note payable to Valley Bank. Valley Bank
has agreed to reduce the face value of the note from P5,000,000 to P4,000,000, reduce the
interest rate from 15% to 10%, and extend the due date three years from the date of
restructuring. The restructuring will occur on December 31, 20CY, the last day of
Compostela’s annual reporting period. The unpaid interest on the restructured loan at this
time is P750,000 which is forgiven. The tax rate is 35%. (Round off present value
factors to four decimal places)

How much is the on gain on extinguishment of debt for the year 20CY?

P 550,000
P1,750,040
P2,206,720
P0
Ans.
P2,206,720

There is substantial modification of terms of an old financial liability if the gain or loss on
extinguishment is

At least 10% of the carrying amount of the old liability.

Less than 10% of the carrying amount of the old liability
At least 10% of the new liability
Less than 10% of the new liability
Ans.
At least 10% of the carrying amount of the old liability.