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Module 2 - Notes Payable Debt Restructuring
Module 2 - Notes Payable Debt Restructuring
Module 2 - Notes Payable Debt Restructuring
NOTES PAYABLE
& DEBT
RESTRUCTURING
(120,000 x 2/12)
Note Payable 1,000,000
Less: Discount (12% x 1,000,000) 120,000
FS Presentation : Dec. 31, 2020
Net Proceeds 880,000
Note Payable 1,000,000
Discount on Notes Payable 120,000 *The Discount on Note Payable is a direct deduction
Note Payable from the face amount of the Note Payable
1,000,000
Illustration 2 : INTEREST BEARING NOTE
Dec. 31, 2020 : Payment of First installment &
On January 1, 2020, an entity Interest
acquired an equipment for
Interest Expense (10% x 1M) 100,000
P1,000,000 payable in 5 equal
installments every December 31 of Note Payable 200,000
each year. Interest is 10% on the
unpaid balance. Cash 300,000
Journal Entry : Jan. 1, 2020 Dec. 31, 2021 : Payment of Second Installment &
Interest
Equipment 1,000,000
Interest Expense (10% x 800,000) 80,000
Note Payable 1,000,000
Note Payable 200,000
Cash 280,000
Illustration 3 : NON INTEREST BEARING
NOTE
Dec. 31, 2020 : Payment of Annual Installment
On January 1, 2020, an entity
acquired an equipment with a cash Note Payable 100,000
price of P350,000 for P500,000,
Cash 100,000
P100,000 down and the balance
payable in 4 equal annual
installments. Dec. 31, 2021 : Amortization of the discount for 2020
The entity has elected irrevocably the fair value Interest Expense (12% x 4M) 480,000
option for measuring note payable. Cash 480,000
The change in fair value comprised P50,000
attributable to credit risk and P450,000 attributable
to interest risk. Note Payable 500,000
Gain from Change in Fair Value 450,000
Carrying Amount 4,000,000
Gain from credit risk – OCI 50,000
Fair Value – December 31, 2020 3,500,000
*The Gain from Change in Fair Value is recognized in Profit or Loss
Decrease in FV of Liability – Gain 500,000 *The Gain from Credit Risk is recognized in other comprehensive
income
SAMPLE EXERCISES
Please get your calculator, ballpen and paper
EXERCISE NO. 1
ASSET SWAP
EQUITY SWAP
MODIFICATION OF TERMS
ASSET SWAP
*If the balance of the obligation including accrued Accumulated depreciation 800,000
interest and other charges is more than the carrying Land 500,000
amount of the property mortgaged, there is a gain on
Building 4,000,000
extinguishment of debt.
EQUITY SWAP
Is a transaction whereby a debtor and creditor may
renegotiate the terms of a financial liability with the
result that the liability is full or partially extinguished by
the debtor issuing equity instruments to the creditor.
The entity issued share capital with a total par Carrying Amount of Bonds Payable 5,500,000
value of P2,000,000 and fair value of P4,500,000 Fair Value of Shares Issued 4,500,000
in full settlement of the bonds payable and Gain on Extinguishment of Debt 1,000,000
accrued interest.
Journal Entry
Bonds Payable 5,000,000
On the other hand, the fair value of the bonds
Accrued Interest Payable 500,000
payable is P4,700,000.
Share Capital 2,000,000
Share Premium 2,500,000
Gain on Extinguishment of Debt 1,000,000
Illustration : EQUITY SWAP
PRIORITY 2 : FAIR VALUE OF BONDS PAYABLE ISSUED
An entity showed the following data at year Fair Value of Bonds Payable 4,700,000
end: Par value of shares issued 2,000,000
Share Premium 2,700,000
Bonds Payable 5,000,000
Accrued interest payable 500,000 Bonds Payable 5,000,000
Accrued Interest Payable 500,000
The entity issued share capital with a total par Carrying Amount of Bonds Payable 5,500,000
value of P2,000,000 and fair value of P4,500,000 Fair Value of Bonds Payable 4,700,000
in full settlement of the bonds payable and Gain on Extinguishment of Debt 800,000
accrued interest.
Journal Entry
Bonds Payable 5,000,000
On the other hand, the fair value of the bonds
Accrued Interest Payable 500,000
payable is P4,700,000.
Share Capital 2,000,000
Share Premium 2,700,000
Gain on Extinguishment of Debt 800,000
Illustration : EQUITY SWAP
PRIORITY 3 : CARRYING AMOUNT OF BONDS PAYABLE ISSUED
An entity showed the following data at year Carrying Amount of Bonds Payable 5,500,000
end: Par value of shares issued 2,000,000
Share Premium 3,500,000
Bonds Payable 5,000,000
Accrued interest payable 500,000
Journal Entry
Bonds Payable 5,000,000
The entity issued share capital with a total par
value of P2,000,000 and fair value of P4,500,000 Accrued Interest Payable 500,000
in full settlement of the bonds payable and Share Capital 2,000,000
accrued interest.
Share Premium 3,500,000
The entity is granted by the creditor the following STEP 2 : COMPUTE FOR THE DISCOUNT ON NOTE PAYABLE
concessions on January 1, 2020: Present Value of New Note Payable 3,533,880
a. The accrued interest of P1,000,000 is forgiven. Face Value of New Note Payable 4,000,000
b. The principal obligation is reduced to P4,000,000. Discount on Note Payable 466,120
c. The new interest rate is 10% payable every
December 31. STEP 3 : COMPUTE FOR THE GAIN / LOSS ON
EXTINGUISHMENT OF DEBT
d. The new date of maturity is December 31, 2023.
Carrying Amount of Old Liability (Face
6,000,000
Value of 5M + Accrued Interest of 1M)
The present value of 1 at 14% for 4 periods is 0.5921 Present Value of New Note Payable 3,533,880
and the present value of ordinary annuity of 1 at 14%
for 4 periods is 2.9137. Gain on Extinguishment of Debt 2,466,120
Illustration1: MODIFICATION OF TERMS
SUBSTANTIAL MODIFICATION
Journal Entry to record the extinguishment of the old note STEP 1 : COMPUTE THE PRESENT VALUE OF NEW NOTE
payable: PAYABLE (using the old rate of 14%)
Note Payable – old 5,000,000 PV of principal (4,000,000 x .5921) 2,368,400
Accrued Interest Payable 1,000,000 PV of interest payments (400,000 x 2.9137) 1,165,480
Discount on Note Payable 466,120 Present Value of New Note Payable 3,533,880
Note Payable – new 4,000,000 STEP 2 : COMPUTE FOR THE DISCOUNT ON NOTE PAYABLE
Gain on extinguishment of debt 2,466,120
Present Value of New Note Payable 3,533,880
Face Value of New Note Payable 4,000,000
Journal Entry to record the interest payment on the new note
payable for 2020 Discount on Note Payable 466,120
Interest Expense (10% x 4,000,000) 400,000 STEP 3 : COMPUTE FOR THE GAIN / LOSS ON
Cash 400,000 EXTINGUISHMENT OF DEBT
To amortize the discount on note payable for 2020: Carrying Amount of Old Liability (Face
6,000,000
Value of 5M + Accrued Interest of 1M)
Interest expense 94,743
Present Value of New Note Payable 3,533,880
Discount on Note Payable 94,743
Gain on Extinguishment of Debt 2,466,120
Illustration1: MODIFICATION OF TERMS
SUBSTANTIAL MODIFICATION
Journal Entry to record the extinguishment of the old note Journal Entry for 2020 on the books of the creditor:
payable:
Note Receivable – new 4,000,000
Note Payable – old 5,000,000
Los on debt restructure 2,466,120
Accrued Interest Payable 1,000,000
Note Receivable – old 5,000,000
Discount on Note Payable 466,120
Accrued Interest Receivable 1,000,000
Note Payable – new 4,000,000
Unearned Interest Income 466,120
Gain on extinguishment of debt 2,466,120
To amortize the discount on note payable for 2020: Journal Entry for 2020 on the books of the creditor: