NP & Debt Restructuring HO - 2064575149

1.
National Bank grants a 10-year loan to Abbo Company in the amount of P1,500,000 with a
stated interest rate of 6%. Payments are due monthly and are computed to be P16,650.
National Bank incurs P40,000 of direct loan origination cost and P20,000 of indirect loan
origination cost. In addition, National Bank charges Abbo a 4-point nonrefundable loan
origination fee. Abbo, the borrower, has a carrying amount of
a. P1,440,000 c. P1,500,000
b. P1,480,000 d. P1,520,000
LECTURE NOTES:
PFRS 9
Sub-sequent
Category Initial Changes in FV
FL@FV (Trading) FV FV P/L
FL@FV (Designated) FV FV Credit risk – OCI
Others – P/L
FL@AC FV - TC AC Ignore
2. When a note payable is exchanged for property, goods, or services, the stated interest rate is
presumed to be fair unless
a. No interest rate is stated.
b. The stated interest rate is unreasonable.
c. The stated face amount of the note is materially different from the current cash sales price
for similar items or from current fair value of the note.
d. Any of these.
LECTURE NOTES:
Fair Value of Notes Payable
Fair value = PV of Cash Flows

Short Term = Face value/Transaction price
Long Term:
Interest bearing:
Realistic/Market rate = Face value
Unrealistic/Below market rate:
1) Cash price
2) PV of cash flows discounted using prevailing interest rate
Non-Interest bearing:
1) Cash price
2) PV of cash flows discounted using prevailing interest rate
3. On July 1, 2016, ETC purchased a noncash asset with a list price of P260,000 by issuing a five-
year noninterest-bearing note. The market or "going" rate of interest for this note was 12%.
The note will; be paid in five equal annual P64,000 installments each June 30, 2017 through
2021. The amount that should be recorded for the net liability on July 1, 2016, is:
a. P230,707 c. P258,388
b. P260,000 d. P281,600
4. What is the relationship between present value and the concept of a liability?
a. Present values are not used to measure liabilities.
b. Present values are used to measure all liabilities.
c. Present values are only used to measure non-current liabilities.
d. Present values are used to measure certain liabilities.
5. Current liabilities are normally recorded at the amount that the entity expects to pay rather
than at their present value. This practice can be supported according to the concept of:
a. Matching.
b. Consistency.
c. Materiality.
d. Conservatism.
6. Silver Company purchased merchandise for resale on January 1, 2016, for P5,000 cash plus a
P20,000, two-year note payable. The principal is due on December 31, 2017; 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,
2016?
a. P20,000 c. P19,142
b. P18,783 d. P17,724
7. On December 31, 2016, Park 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, 2016, and the prevailing rate of interest for this type of note at
date of issuance is 12%. The interest expense to be reported by Park in its 2017 income
statement is
a. P37,969 c. P30,301
b. P31,969 d. P27,901
Use the following information for the next two questions.

Funan Industries purchases new specialized manufacturing equipment on July 1, 2015. The
equipment cash price is P79,000. Funan 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, 2016.
8. The carrying amount of the note payable on December 31, 2016 is

a. P62,966 c. P66,115
b. P56,329 d. P59,818
9. The total interest expense for the year ended December 31, 2016 is
a. P6,900 c. P6,612
b. P6,599 d. P5,982
E12-24 Skousen, 15th ed - AMP:
Date Payment Interest Principal C.A.

7/1/15 69,000
6/30/16 12,934 6,900 6,034 62,966
6/30/17 12,934 6,297 6,637 56,329
10.Which of the following is not a relevant consideration when evaluating whether to derecognize
a financial liability?
a. Whether the obligation has been discharged.
b. Whether the obligation has been canceled.
c. Whether the obligation has expired.
d. Whether substantially all the risks and rewards of the obligation have been transferred.
11.Misamis Company is indebted to Occidental Company under a P5,000,000, 10% three-year

note dated December 31, 2013. Because of financial difficulties, Misamis owed accrued interest
of P500,000 on the note at December 31, 2016. Under a debt restructuring on December 31,
2016, 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 2016 income statement Misamis should report gain on extinguishment
of debt at
a. P2,500,000 c. P2,000,000
b. P4,500,000 d. P2,925,000
12.A debtor and creditor might renegotiate the terms of a financial liability with the result that the
debtor extinguishes the liability fully or partially by issuing equity instruments to the creditor.
This transaction is sometimes referred to as
a. Troubled debt restructuring
b. Shared-based payment
c. Debt for equity swap
d. Any of the above.
13.On December 30, 2016, Pale Corp. paid P400,000 cash and issued 80,000, P1 par value,
ordinary shares to its unsecured creditors on a pro rata basis pursuant to a reorganization plan.
Pale owed these unsecured creditors a total of P1.2 million. Pale’s ordinary share was trading
at P1.25 per share on December 30, 2016. Pale Corp. should report gain on extinguishment
of debt at
a. P800,000 c. P700,000
b. P720,000 d. P100,000
Use the following information for the next two questions.

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, 2016, 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)
14.How much is the on gain on extinguishment of debt for the year 2016?
a. P 550,000 c. P2,206,720
b. P1,750,040 d. P 0
15.How much is the interest expense in 2017?
a. P400,000 c. P399,996
b. P531,492 d. P354,328
LECTURE NOTES:
Modification of terms
Substantially modified
• [(CA old - PV new)/ CA old] ≥ 10%
• Gain or loss is recognized
Not substantially modified

• [(CA old - PV new)/ CA old] < 10%
• Gain or loss is not recognized
16.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, 2016. 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, 2017?
a. P4,000,000 c. P4,666,667
b. P4,700,500 d. P4,910,000
17.On December 31, 2016, 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 2016 from this troubled debt restructuring?
a. P100,000 c. P213,024
b. P200,000 d. P313,024

NP & Debt Restructuring HO - 2064575149

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1.

Fair value = PV of Cash Flows

Use the following information for the next two questions.

8. The carrying amount of the note payable on December 31, 2016 is

Date Payment Interest Principal C.A.

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

Use the following information for the next two questions.

Not substantially modified

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