Accountancy

Review Center (ARC)

of the Philippines Inc.

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STUDENT HANDOUTS
FAR-129 NOTES PAYABLE & DEBT RESTRUCTURING CABARLES/SAGOT/CAYETANO
FINANCIAL ACCOUNTING & REPORTING MAY 2021 CPALE REVIEW

DISCUSSION

Numbers 1-5:
On January 1, 2022, Suba Company acquired a tract of land for P5,250,000. The entity paid P1,250,000 down and signed a
non-interest-bearing note for the balance which is due on January 1, 2025. There was no established exchange price for the
land and the note had no ready market. The prevailing interest rate for this type of note was 12%.
The present value of 1 at 12% for 3 periods is 0.7118.

1. What is the carrying amount of the notes payable on January 1, 2022?

A. 4,000,000 C. 3,202,441
B. 2,847,200 D. 3,736,950

2. What is the carrying amount of the notes payable on December 31, 2022?
A. 4,000,000 C. 3,586,734
B. 3,188,864 D. 4,185,384

3. What is the interest expense for the year ended December 31, 2022?
A. 480,000 C. 384,289
B. 341,664 D. 448,434

4. What is the non-current portion of the notes payable on December 31, 2022?
A. 4,000,000 C. 3,571,528
B. 3,188,864 D. 0

5. What is the current portion of the notes payable on December 31, 2022?
A. 4,000,000 C. 3,571,528
B. 3,188,864 D. 0

Number 6-10:
On January 1, 2021, Thank U, Next! Corporation issued a three year non-interest bearing note with face value of P3,000,000
for a piece of land purchased from Ariana Corporation. The note is payable in annual installments of P1,000,000 every
December 31, starting on December 31, 2021.

The land has an equivalent cash price of P2,400,000, a price that provides the note an effective interest rate of 12%. The
present value factor of annuity for 12% for 3 periods is 2.40.

6. What is the carrying amount of the notes payable on January 1, 2021?

A. 3,000,000 C. 2,400,000
B. 7,200,000 D. 2,688,000

7. What is the carrying amount of the notes payable on December 31, 2021?
A. 3,000,000 C. 1,688,000
B. 2,688,000 D. 5,064,000

8. What is the interest expense for the year ended December 31, 2021?
A. 360,000 C. 240,000
B. 288,000 D. 168,000

9. What is the non-current portion of the notes payable on December 31, 2021?
A. 1,000,000 C. 890,560
B. 805,120 D. 797,440

10. What is the current portion of the notes payable on December 31, 2021?
A. 1,000,000 C. 890,560
B. 805,120 D. 797,440
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Number 11-12:
On April 1, 2020, Memories Company issued a P9,000,000 non interest bearing note due March 31, 2023 for a piece of land
with a cash price of P6,949,800.

11. Determine the effective interest rate of this note:

A. 10.00% C. 9.00%
B. 11.11% D. 13.33%

12. What is the carrying amount of the notes payable as of the year ended December 31, 2020?
A. 7,418,912 C. 7,575,282
B. 7,721,923 D. 7,876,438

Number 13 and 14:

On January 1, 2019, Russkiv Company acquired machinery by issuing a 3-year, P4,800,000 noninterest-bearing note payable
due as follows:
December 31, 2019 2,400,000
December 31, 2020 1,600,000
December 31, 2021 800,000
Total 4,800,000

The prevailing rate of interest of this type of note is 10% with the following relevant present value factors:
Periods Present value of 1 at 10% PV of annuity of 1 at 10%
1 0.909 0.909
2 0.827 1.736
3 0.751 2.487

13. How much is the carrying amount of the note on initial recognition?
A. 4,105,600 C. 3,980,600
B. 4,100,800 D. 3,086,800

14. How much is the carrying amount of the note on December 31, 2019?
A. 2,342,140 C. 2,250,780
B. 2,279,830 D. 2,116,160

Numbers 15, 16, 17, 18 and 19:

On January 1, 2017, Talon Flames bought a machine from Blames Co. in lieu of cash payment, Talon Flames gave Blames a
4-year P4,000,000, 15% note payable. Principal is due on December 31, 2020 but interest is due annually every December
31. The prevailing interest rate for this type of note is 10% with the following present value factors:

Present value of 1 PV of annuity of Present value of PV of annuity of

Periods at 10% 1 at 10% 1 at 15% 1 at 15%
4 0.683 3.170 0.572 2.855

15. How much is the carrying amount of the note on January 1, 2017?
A. 3,784,000 C. 4,000,000
B. 3,796,000 D. 4,634,000

16. How much is the interest expense for 2017?

A. 695,000 C. 434,700
B. 463,400 D. 600,000

17. How much is the carrying amount of the note on December 31, 2017?
A. 4,000,000 C. 5,097,400
B. 4,497,400 D. 4,578,500

18. How much is the current portion of the note on December 31, 2017?
A. 220,380 C. 150,260
B. 600,000 D. 0

19. How much is the noncurrent portion of the note on December 31, 2017?
A. 4,000,000 C. 4,497,400
B. 5,097,400 D. 0

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20. On September 1, 2019, Tom company borrowed on a P1,650,000 note payable from ABN Bank. The note bears interest
at 12% and is payable in three equal annual payments of P550,000. On this date, the bank’s prime rate is 11%. The first
annual payment for interest and principal was made in September 1, 2020. At December 31, 2020, what amount should
Tom company report as accrued interest payable?
A. 66,000 C. 60,500
B. 44,000 D. 40,333

21. Sundown Company has bonds payable with face amount of P5,000,000 and a carrying amount of P5,150,000. In addition,
unpaid interest on the bonds has been accrued in the amount of P300,000. The creditor has agreed to the settlement of
the bonds payable in exchange for land with fair value of P4,500,000. The land has a historical cost of P3,200,000. What
amount of pretax gain on extinguishment should Sundown Company report as component of income from continuing
operations in 2017?
A. 2,250,000 C. 2,100,000
B. 950,000 D. 1,950,000

22. The Melaren Company is going through some financial problems in 2020. A group of creditors holding P1,000,000 of 14%
debenture bonds issued by Melaren agreed to accept 80,000 shares of P10 par common share in full payment of the
obligation. Interest equivalent to one-year period is still outstanding. Melaren share has a market value of P12 per share
in 2020. An unamortized premium of P15,000 for the P1,000,000 bonds is outstanding. What amount of gain on
restructuring of debt should be reported by Melaren in 2020?
A. 355,000 C. 195,000
B. 55,000 D. 0

23. On January 1, 2023, Kobiachi Company issued P3,000,000, 11% bonds for P3,195,000. The market rate of interest for
these bonds is 10% and mature on January 1, 2034. Interest is payable annually on December 31. Kobiachi used the
effective-interest method of amortization.

On December 31, 2024, Kobiachi was under financial difficulty and therefore entered into a debt restructuring agreement
with the credit. In the agreement, Kobiachi will issue 20,000 shares with P100 par value on December 31, 2024 to settle
the bonds. On such date, the shares do not have fair value but the bonds are quoted at 104. Kobiachi was unable to pay
the required interest on December 31, 2024. Interest was accrued on such date. What amount of gain on extinguishment
should be recognized for 2024?
A. 307,950 C. 120,000
B. 382,950 D. 52,950

Number 24-26:
Due to extreme financial difficulties, Paula Company negotiated a restructuring of a 10%, P5,000,000 note payable due on
December 31, 2019. The unpaid interest on the note on such date is P500,000. The creditor agreed to reduce the face value
to P4,000,000, forgive the unpaid interest, reduce the interest rate to 8% and extend the due date three years from December
31, 2019. The present value of 1 at 10% for three periods is 0.75 and the present value of an ordinary annuity of 1 at 10% for
three periods is 2.49.

24. Under IFRS, what is the gain on extinguishment?

A. 1,703,200 C. 2,000,000
B. 1,203,200 D. 540,000

25. What amount be reported as interest expense?

A. 320,000 C. 400,000
B. 379,680 D. 303,680

26. What is the carrying amount of note payable on December 31, 2020?
A. 4,000,000 C. 3,856,480
B. 5,000,000 D. 3,737,120

27. Due to adverse economic circumstances and poor management, Lyka had negotiated a restructuring of the 8%
P7,000,000 note payable to a bank on January 1, 2023. There is no accrued interest on the note. Lyka has reduced the
principal obligation from P7,000,000 to P6,000,000 and extend the maturity to 3 years on December 31, 2025. However,
the new interest rate is 11% payable annually every December 31. The present value of 1 at 8% for three periods is 0.79
and the present value of an ordinary annuity of 1 at 8% for three periods is 2.58.

What is the gain on modification of debt for 2023?

A. 557,200 C. 980,000
B. 577,200 D. 0

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