Problem 6 - DEBT RESTRUCTURING: ASSET SWAP, EQUITY SWAP AND MODIFICATION OF

TERMS

MARIANA CORPORATION is having financial difficulty and therefore has asked NALOOY
Bank to restructure its P3 million note outstanding. The presented note has 3 years
remaining and pays a current rate of interest of 10%. The present market rate for a loan of
this nature is 12%. The note was issued at its face value.

Presented below are four independent situations. Determine the journal entry that Mariana
would make for each of the following types of debt restructuring.

1. NALOOY Bank agrees to take an equity interest in Mariana by accepting

common stock valued at 2,400 in exchange for relinquishing its claim on this note. The
common stock has a par value of P1,200,000.
a. Notes payable 3,000,000
Common stock 3,000,000
b. Notes payable 3,000,000
Common stock 1,200,000
APIC 1,800,000
c. Notes payable 3,000,000
Common stock 1,200,000
Interest expense 300,000
APIC 1,500,000
d. No adjustment

2. NALOOY Bank agrees to accept land in exchange for relinquishing its claim
on this note. The land has a book value of P2,000,000 and a fair value of P2,500,000.
a. Notes payable 3,000,000
Land 2,500,000
Gain on debt restructuring 500,000
b. Notes payable 3,000,000
Land 2,000,000
Interest expense 300,000
Gain on exchange 200,000
Gain on debt restructuring 500,000
c. Notes payable 3,000,000
Land 2,000,000
Gain on exchange 500,000
Gain on debt restructuring 500,000
d. No adjustment

3. NALOOY Bank agrees to modify the terms of the note, indicating that Dolores
does not have to pay any interest on the note over the 3-year period.
a. Interest payable 300,000
Gain on debt restructuring 300,000
b. Loss on debt restructuring 300,000
 Interest expense 300,000
c. Interest expense 900,000
Gain on debt restructuring 900,000
d. No adjustment

4. NALOOY Bank agrees to reduce the principal balance due to P2,000,000 and require
interest only in the second and third year at a rate of 10%.
a. Notes payable – old 3,000,000
Notes payable – new 2,400,000
Gain on debt restructuring 600,000
b. Notes payable - old 3,000,000
Notes payable – new 3,000,000
c. Notes payable – old 3,000,000
Notes payable – new 2,600,000
Gain on debt restructuring 400,000
d. No adjustment

Solution
1. B
Notes payable 3,000,000
Common stock 1,200,000
APIC 1,800,000
2. C
Notes payable 3,000,000
Land 2,000,000
Gain on exchange 500,000
Gain on debt restructuring 500,000
3. D No Adjustment
4. A
Notes payable – old 3,000,000
Notes payable – new 2,400,000
Gain on debt restructuring 600,000