1 Rainbow Company showed the following balances on December 31, 2020:

Note payable – due December 31,2020 1,000,000

Accrued interest payable 200,000

The entity is in financial distress and negotiates with the creditor for the settlement of the note payable.

Consequently, the entity transferred a patent to the creditor in full satisfaction of the note payable.

The patent has a carrying amount of P600,000 and a fair value of P1,100,000.

Required:
Prepare journal entry to record the asset swap on the books of Rainbow Company.

SOLUTION:

Face Amount of Notes Payable 1,000,000

Accrued Interest Payable 200,000
Total Liability 1,200,000
Carrying Amount of Patent - 600,000
Gain on Extinguishment of Debt 600,000

Journal Entries

Notes Payable 1,000,000

Accrued Interest Payable 200,000
Patent 600,000
Gain on Extinguishment of Debt 600,000
ement of the note payable.

on of the note payable.

2 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.

Required:
Prepare journal entry necessary on the books of Sundown Company to record the settlement of the bonds payable

SOLUTION:

Face Amount of Bonds Payable 5,000,000

Accrued Interest Payable 300,000
Total Liability 5,300,000
Carrying Amount of Land - 3,200,000
Gain on Extinguishment of Debt 2,100,000

Journal Entry

Bonds Payable 5,000,000

Accrued Interest Payable 300,000
Land 3,200,000
Gain on Extinguishment of Debt 2,100,000
 amount of P5,150,000.

with fair value of P4,500,000.

ttlement of the bonds payable.

3 Sunshine Company showed the following data with respect to a matured obligation:
Mortgage payable 5,000,000
Accrued interest payable 500,000

The entity is threatened with a court suit if it could not pay its maturing debt. Accordingly, the entity entered in
agreement with the creditor for the issuance of share capital in full settlement of the mortgage.

The agreement provided for the issue of 35,000 shares with par value of P100. The share is currently quoted at

Required:
Prepare journal entry to record the equity swap on the books of Sunshine Company:
a. If the fair value of the share capital is used for the equity swap.
b. If the fair value of the liability is used for the equity swap.
c. If the carrying amount of the liability is used for the equity swap.

SOLUTION:

A) Fair Value of Shares Issued

Par Value of Shares Issued
Share Premium

Mortgage Payable
Accrued Interest Payable
Carrying Amount of Mortgage Payable
Fair Value of Shares Issued
Gain on Extinguishment of Debt

Journal Entry

Mortgage Payable 5,000,000

Accrued Interest Payable 500,000
Share Capital
Share Premium
Gain on Extinguishment

B) Fair Value of Liability

Par Value of Shares Issued
Share Premium

Mortgage Payable
Accrued Interest Payable
Carrying Amount of Mortgage Payable
Fair Value of Shares Issued
Gain on Extinguishment of Debt
 Journal Entry

Mortgage Payable 500,000

Carrying Amount of Mortgage Payable 5,500,000
Share Capital
Share Premium
Gain on Extinguishment

C) Carrying Amount of Mortgage Payable

Par Value of Shares Issued
Share Premium

Journal Entry

Mortgage Payable 5,000,000

Accrued Interest Payable 500,000
Share Capital
Share Premium
matured obligation:

aturing debt. Accordingly, the entity entered into an

ull settlement of the mortgage.

value of P100. The share is currently quoted at P130. The fair value of the liability is P4,700,000.

oks of Sunshine Company:

4,550,000
3,500,000
1,050,000

5,000,000
500,000
5,500,000
- 4,550,000
950,000

3,500,000
1,050,000
950,000

4,700,000
3,500,000
1,200,000

5,000,000
500,000
5,500,000
- 4,700,000
800,000
3,500,000
1,200,000
800,000

5,500,000
3,500,000
2,000,000

3,500,000
2,000,000