Since 1977

FAR OCAMPO/CABARLES/SOLIMAN/OCAMPO
FAR.2928-Notes Payable OCTOBER 2020

DISCUSSION PROBLEMS
1. National Bank grants a 10-year loan to Abbo Company 4. On December 31, 2020, Park Company purchased
in the amount of P1,500,000 with a stated interest rate equipment from Ott Corp. and issued a noninterest-
of 6%. Payments are due monthly and are computed bearing note requiring payment of P50,000 annually
to be P16,650. National Bank incurs P40,000 of direct for ten years. The first payment is due December 31,
loan origination cost and P20,000 of indirect loan 2020, and the prevailing rate of interest for this type of
origination cost. In addition, National Bank charges note at date of issuance is 12%. The interest expense
Abbo a 4-point nonrefundable loan origination fee. to be reported by Park in its 2021 income statement is
Abbo, the borrower, has a carrying amount of a. P37,969 c. P30,301
a. P1,440,000 c. P1,500,000 b. P31,969 d. P27,901
b. P1,480,000 d. P1,520,000
5. House Publishers offered a contest in which the winner
LECTURE NOTES: would receive P1 million payable over 20 years. On
December 31, 2020, House announced the winner of
Financial Liabilities Measurement Summary (PFRS 9)
the contest and signed a note payable to the winner
Sub- for P1 million, payable in P50,000 installments every
Category Initial sequent Changes in FV January 2. Also on December 31, 2020, House
FL@FV FV FV P/L purchased an annuity for P418,250 to provide the
(Trading) P950,000 prize monies remaining after the first
FL@FV FV FV Credit risk – OCI P50,000 installment, which was paid on January 2,
(Designated) Others – P/L 2021. In its 2020 profit or loss, what should House
FL@AC FV - TC AC Ignore report as contest prize expense?
a. P 0 c. P 468,250
b. P418,250 d. P1,000,000
2. When a note payable is exchanged for property, goods,
or services, the stated interest rate is presumed to be
fair unless Use the following information for the next two questions.
a. No interest rate is stated. Funan Industries purchases new specialized manufacturing
b. The stated interest rate is unreasonable. equipment on July 1, 2019. The equipment cash price is
c. The stated face amount of the note is materially P79,000. Funan signs a deferred payment contract that
different from the current cash sales price for provides for a down payment of P10,000 and an 8-year
similar items or from current fair value of the note. note for P103,472. The note is to be paid in 8 equal
d. Any of these. annual payments of P12,934. The payments include 10%
interest and are made on June 30 of each year, beginning
LECTURE NOTES: June 30, 2020.
Fair Value of Notes Payable 6. The carrying amount of the note payable on December
31, 2020 is
Fair value = PV of Cash Flows a. P66,115 c. P59,818
Short Term = Face value/Transaction price b. P62,966 d. P56,329

Long Term: 7. The total interest expense for the year ended
Interest bearing: December 31, 2020 is
Realistic/Market rate = Face value a. P6,900 c. P6,599
Unrealistic/Not at market rate: b. P6,612 d. P5,982
1) Cash price
2) PV of cash flows discounted using prevailing AMORTIZATION SCHEDULE –WITH DISCOUNT ACCOUNT:
interest rate
Non-Interest bearing: Date Disc. Amort. Payment C.A.
1) Cash price 7/1/19 69,000
2) PV of cash flows discounted using prevailing
interest rate 6/30/20 6,900 12,934 62,966

3. Silver Company purchased merchandise for resale on 6/30/21 6,297 12,934 56,329
January 1, 2020, for P5,000 cash plus a P20,000, two-
year note payable. The principal is due on December AMORTIZATION SCHEDULE –W/O DISCOUNT ACCOUNT:
31, 2021; the note specified 8 percent interest payable
each December 31. Silver's going rate of interest for Date Payment Interest Principal C.A.
this type of debt was 15 percent. How much is the
carrying amount of the note payable on December 31, 7/1/19 69,000
2020?
6/30/20 12,934 6,900 6,034 62,966
a. P20,000 c. P18,783
b. P19,142 d. P17,724 6/30/21 12,934 6,297 6,637 56,329

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EXCEL PROFESSIONAL SERVICES, INC.
8. 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.
9. Misamis Company is indebted to Occidental Company
under a P5,000,000, 10% three-year note dated
December 31, 2017. Because of financial difficulties,
Misamis owed accrued interest of P500,000 on the
note at December 31, 2020. Under a debt
restructuring on December 31, 2020, 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 30%. In its 2020
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
10. 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.
11. Which statement is incorrect regarding IFRIC 19
Extinguishing Financial Liabilities with Equity
Instruments?
a. The issue of an entity’s equity instruments to a
creditor to extinguish all or part of a financial
liability is consideration paid in accordance with
PFRS 9.
b. When equity instruments issued to a creditor to
extinguish all or part of a financial liability are
recognized initially, an entity shall measure them
at the fair value of the equity instruments issued,
unless that fair value cannot be reliably measured.
c. If the fair value of the equity instruments issued
cannot be reliably measured, the equity
instruments shall be measured to reflect the fair
value of the financial liability extinguished.
d. The difference between the carrying amount of the
financial liability (or part of a financial liability)
extinguished, and the consideration paid, shall be
recognized as a separate component of equity.
12. On December 30, 2020, 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, 2020.
Pale Corp. should report gain on extinguishment of
debt at
a. P800,000 c. P700,000
b. P720,000 d. P100,000
13. Which of the following shall be accounted for as an
extinguishment of the original financial liability and the
recognition of a new financial liability?
a. An exchange between an existing borrower and
lender of debt instruments with substantially
different terms.
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b. A substantial modification of the terms of an
existing financial liability or a part of it (whether or
not attributable to the financial difficulty of the
debtor).
c. Both a and b.
d. Neither a nor b.
LECTURE NOTES:
Modification of terms
Substantially modified
• [(CA old - PV new)/ CA old] ≥ 10%
• Accounted for as debt extinguishment
Not substantially modified
• [(CA old - PV new)/ CA old] < 10%
• Not accounted for as debt extinguishment
14. Which statement is incorrect regarding accounting for
the costs or fees incurred in the exchange of debt
instruments or modification of terms of an existing
financial liability?
a. Recognized as part of the gain or loss on the
extinguishment if the exchange or modification of
terms is accounted for as an extinguishment.
b. Adjust the carrying amount of the liability and are
amortized over the remaining term of the modified
liability if the exchange or modification is not
accounted for as an extinguishment.
c. Both a and b.
d. Neither a nor b.
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, 2020, 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 30%. (Round off
present value factors to four decimal places)
15. How much is the on gain on extinguishment of debt for
the year 2020?
a. P2,206,720 c. P1,544,704
b. P1,750,000 d. P 0
16. How much is the interest expense in 2021?
a. P600,000 c. P400,000
b. P531,492 d. P354,328
17. 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, 2020. There
is no unpaid interest on the restructured loan at this
time. The tax rate is 30%. Which statement is correct
in accordance with PFRS 9?
a. This shall be accounted for as an extinguishment of
the original financial liability and the recognition of
a new financial liability.
b. A gain or loss should not be recognized.
c. The difference between the original and modified
cash flows should be amortized over the remaining
term of the modified liability by re-calculating the
effective interest rate.
FAR.2928
EXCEL PROFESSIONAL SERVICES, INC.
d. A gain or loss should be recognized in profit or loss
calculated as the difference between the original
contractual cash flows and the modified cash flows
discounted at the original effective interest rate.
18. Which statement is incorrect if an entity revises its
estimates of payments or receipts (excluding
modifications in accordance with PFRS 9 paragraph
5.4.3 and changes in estimates of expected credit
losses)?
a. The entity shall adjust the gross carrying amount
of the financial asset or amortized cost of a
financial liability to reflect actual and revised
estimated contractual cash flows.
b. The entity recalculates the gross carrying amount
of the financial asset or amortized cost of the
financial liability as the present value of the
estimated future contractual cash flows that are
discounted at the financial instrument’s original
effective interest rate.
c. The entity shall recognize the adjustment in the
gross carrying amount in profit or loss as income
or expense.
d. None, all the statements are correct.
19. On December 31, 2020, 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.
DO-IT-YOURSELF (DIY) DRILL
1. On July 1, 2020, Riviera Manufacturing Co. issued a
five-year note payable with a face amount of P250,000
and an interest rate of 10 percent. The terms of the
note require Riviera to make five annual payments of
P50,000 plus accrued interest, with the first payment
due June 30, 2021. With respect to the note, the
current liabilities section of Riviera's December 31,
2020, statement of financial position should include
a. P12,500 c. P62,500
b. P50,000 d. P75,000
2. Spielberg Inc. signed a P200,000 noninterest-bearing
note due in five years from a production company
eager to do business. Comparable borrowings have
carried an 11% interest rate. At what amount should
this debt be carried at its inception?
a. P200,000 c. P118,690
b. P178,000 d. P222,000
3. During 2020 Hingalo Company experienced financial
difficulties and is likely to default on a P500,000, 15%,
three-year note dated January 1, 2019, payable to
Maawain National Bank. On December 31, 2020, the
bank agrees to settle the note and unpaid interest of
P75,000 for 2020 for P50,000 cash and marketable
securities carried at P385,000. What amount should
Hingalo report as a gain from extinguishment of debt
in its 2020 income statement?
a. P150,000 c. P75,000
b. P140,000 d. P65,000
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• 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 2020 from
this troubled debt restructuring?
a. P100,000 c. P213,024
b. P200,000 d. P313,024
20. Which of the following risk is most relevant to notes
payable?
a. The risk that one party to a financial instrument
will cause a financial loss for the other party by
failing to discharge an obligation.
b. The risk that the fair value or future cash flows of a
financial instrument will fluctuate because of
changes in market prices.
c. The risk that an entity will encounter difficulty in
meeting obligations associated with financial
liabilities that are settled by delivering cash or
another financial asset.
d. All of the above.
21. An entity shall disclose:
a. A maturity analysis for financial liabilities.
b. A description of how it manages the liquidity risk
inherent in financial liabilities.
c. Both a and b.
d. Neither a nor b.
- now do the DIY drill -
4. On December 31, 2020, Camiguin Company shows the
following data with respect to its matured obligation.
Note payable P6,000,000
Accrued interest payable 1,500,000
The company is threatened with a court suit if it could
not pay its maturing debt. Accordingly, the company
enters into an agreement with the creditor for the
issuance of ordinary shares in full settlement of the
note payable. The agreement provides for the issue of
50,000 ordinary shares with par value of P100. The
ordinary share is currently quoted at P150 per share.
How much is the share premium arising from the debt
restructuring considered as “equity swap”?
a. P2,500,000 c. P1,000,000
b. P1,500,000 d. P 0
5. Due to adverse economic circumstances and poor
management, Sultan Company has negotiated a
restructuring of its P10,000,000 note payable to
Kudarat Bank. Kudarat Bank has agreed to reduce the
face value of the note to P8,000,000 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,
2020. There is no unpaid interest on the restructured
loan at this time. The tax rate is 30%. In accordance
with PFRS 9, how much gain should be recognized on
modification of terms? (Round off present value factors
to four decimal places)
a. P2,000,000 c. P632,957
b. P 904,224 d. P 0
J - end of FAR.2928 - J
FAR.2928