Problem 6-1

Requirement 1: Prepare the entry to record the issuance of the notes on December 31, 2018.

Present value of Notes Payable (Php 2,400,000 x 0.68301) ₱1,639,224.00

Date Interest Expense Present Value

Dec. 31, 2018 ₱1,639,224.00
Dec. 31, 2019 163,922.40 1,803,146.40
Dec. 31, 2020 180,314.64 1,983,461.04
Dec. 31, 2021 198,346.10 2,181,807.14
Dec.31, 2022 218,192.86 ₱2,400,000.00

GENERAL JOURNAL
Date Page Number 01
Decriptions
2018 PR Debit Credit
Dec-31 Piece of Equipment 1,639,224.00
Discount on Notes Payable (2,400,000 - 1,639,224) 760,776.00
Notes Payable (at face amount) 2,400,000.00
To record the issuance of notes

Requirement 2: What is the equipment’s book value on December 31, 2020?

Straight line method

2,400,000 - 300,000 = 2,100,000
2,100,000/ 5 years = 420,000 depreciation

Equipment’s book value on December 31, 2020 ₱ 1,560,000.00

Requirement 3: What is the carrying value of the notes payable at December 31, 2020?

Carrying value of the notes payable at December 31, 2020 ₱ 1,983,461.04

Problem 6-2
Requirement 1-7:

GENERAL JOURNAL
Date Page Number 01
Decriptions
2020 PR Debit Credit
Aug-01 1. Cash 9,200,000.00
Discount on note payable (10,000,000 x 0.12 x 8/12) 800,000.00
Bond Discount (4,000,000-3,889,893) 10,000,000.00

Dec-31 2. Interest expense 500,000.00

Discount on note payable (800,000 x 5/8) 500,000.00

3. Current Liability as presented on the Financial Statement:

Note payable 10,000,000.00
Discount on note payable - 300,000.00
Carrying amount 9,700,000.00

Current Liabilities
 Note payable 9,700,000.00

2021
Apr-01 4. Interest expense (800,000 x 3/8) 300,000.00
Discount on note payable 300,000.00

Note payable 10,000,000.00

Cash 10,000,000.00

5. Cash 10,000,000.00
Notes payable 10,000,000.00
2020
Dec-31 6. Interest expense (10,000,000 x12% x 5/12) 500,000.00
Accrued interest payable 500,000.00
2021
Apr-01 7. Interest expense (10,000,000 x12% x 3/12) 300,000.00
Note payable 10,000,000.00
Cash 10,300,000.00

Problem 6-3
Requirement 1: If the fair value of the equity instrument is used.
GENERAL JOURNAL
Date Page Number 01
Decriptions
PR Debit Credit
Notes Payable 7,500,000.00
Accrued interest payable 600,000.00
Loss on extinguishment of debt 2,025,000.00
Ordinary share capital 3,375,000.00
Share premium-ordinary 3,375,000.00
Preference share capital 562,500.00
Share premium-preference 2,812,500.00

Requirement 2: If the fair value of the liability is used.

GENERAL JOURNAL
Date Page Number 01
Decriptions
PR Debit Credit
Notes Payable 7,500,000.00
Accrued interest payable 600,000.00
Ordinary share capital 3,375,000.00
Share premium-ordinary 1,425,000.00
Preference share capital 562,500.00
Share premium-preference 1,837,500.00
Gain on extinguishment of debt 900,000.00

Requirement 3: If the carrying amount of the financial liability is used.

GENERAL JOURNAL
Date Page Number 01
Decriptions
PR Debit Credit
Notes Payable 7,500,000.00
Accrued interest payable 600,000.00
Ordinary share capital 3,375,000.00
Share premium-ordinary 2,025,000.00
Preference share capital 562,500.00
Share premium-preference 2,137,500.00
 Ordinary
Preference

Problem 6-4
Requirement 1: Prepare the journal entries for 2020 and 2021 to record the modification of terms.

Present Value of principal (3,500,000 x 0.8573) 3,000,550.00

Present Value of interest payments ((3,500,000 x 0.10) x 1.7833) 624,155.00
Total present value of new liability ₱ 3,624,705.00

Note payable 4,000,000.00

Add: Accrued interest 320,000.00
Carrying amount of old liability 4,320,000.00
Less: Present value of new liability 3,624,705.00
Gain on extinguishment of debt 695,295.00

GENERAL JOURNAL
Date Page Number 01
Decriptions
2020 PR Debit Credit
Jan-01 Note payable- old 4,000,000.00
Accrued interest payable 320,000.00
Note payable- new 3,500,000.00
Premium on note payable (3,624,705 -3,500,000) 124,705.00
Gain on debt extinguishment of debt 695,295.00

Dec-31 Interest expense 350,000.00

Cash 350,000.00

Dec-31 Premium on note payable

Interest expense

Interest paid 350,000.00

Less: Interest expense (3,624,705 x 8%) 289,976.40
Amortization of premium ₱ 60,023.60

2021
Dec-31 Interest expense 350,000.00
Cash 350,000.00

Dec-31 Premium on note payable 64,681.40

Interest expense (124,705 - 60,023.60) 64,681.40

Dec-31 Note payable 3,500,000

Cash 3,500,000