FINANCIAL ACCOUNTING & REPORTING

FAR.102-Notes Payable Integrated Review

LECTURE NOTES

Our topics for 15 hours lecture include the following (based on LECPA syllabus):

• Financial liabilities (Trade and Other Payables, including open accounts)

• Non-financial liabilities
• Provisions and contingencies
• Share Capital Transactions
• Dividends (IFRIC 17)
• Retained Earnings
• Other Comprehensive Income
• Book value and Earnings per Share
• Share-based payments (PFRS2)

Accounting for Financial Liabilities

Initial Recognition
IFRS 9 requires recognition of a financial liability when, and only when, the entity
becomes a party to the contractual provisions of the instrument.

Measurement
Financial Liabilities Measurement Summary (PAS 39)
Category Initial Sub-sequent Changes in FV
FL@FVTPL FV FV P/L
FL@AC FV-TC AC Ignore

Financial Liabilities Measurement Summary (PFRS 9)

Category Initial Sub-sequent Changes in FV
FL@FV(Trading) FV FV P/L
FL@FV(Designated) FV FV Credit risk – OCI
Others – P/L
FL@AC FV – TC AC Ignore

Fair Value of Notes Payable

Fair value = PV of cash flows
Short term = Face value/Transaction price

Long Term:
Interest bearing:
Realistic/Market rate = Face value
Unrealistic/Below market rate:
1) Cash price
2) PV of cash flows discounted using prevailing interest rate

Non-Interest bearing:
1) Cash price
2) PV of cash flows discounted using prevailing interest rate

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FAR Integrated Review Course

Derecognition of a Financial Liability

• A financial liability should be removed from the statement of financial position
when, and only when, it is extinguished, that is, when the obligation specified in
the contract is either discharged, cancelled, or expired.

• Where there has been an exchange between an existing borrower and lender of
debt instruments with substantially different terms, or there has been a
substantial modification of the terms of an existing financial liability, this
transaction is accounted for as an extinguishment of the original financial liability
and the recognition of a new financial liability.

• A gain or loss from extinguishment of the original financial liability is recognized

in the income statement.

- done –

REVIEW QUESTONS

MULTIPLE CHOICE PROBLEMS

1. National Bank grants a 10-year loan to Abbo Company in the amount of
P1,500,000 with a stated interest rate of 6%. Payments are due monthly and
are computed to be P16,650. National Bank incurs P40,000 of direct loan
origination cost and P20,000 of indirect loan origination cost. In addition,
National Bank charges Abbo a 4-point nonrefundable loan origination fee.

Abbo, the borrower, has a carrying amount of

a. P1,440,000 b. P1,480,000 c. P1,500,000 d. P1,520,000

2. On July 1, 2022, ETC purchased a noncash asset with a list price of P260,000 by
issuing a five-year noninterest-bearing note. The market or "going" rate of
interest for this note was 12%. The note will; be paid in five equal annual
P64,000 installments each June 30, 2023 through 2027.

The amount that should be recorded for the net liability on July 1, 2022, is:
a. P230,707 b. P260,000 c. P258,388 d. P281,600

3. Silver Company purchased merchandise for resale on January 1, 2022, for

P5,000 cash plus a P20,000, two-year note payable. The principal is due on
December 31, 2023; the note specified 8 percent interest payable each
December 31. Silver's going rate of interest for this type of debt was 15 percent.

How much is the carrying amount of the note payable on December 31, 2022?
a. P20,000 b. P18,781 c. P19,142 d. P17,724

4. On December 31, 2022, Park Company purchased equipment from Ott Corp. and
issued a noninterest-bearing note requiring payment of P50,000 annually for ten
years. The first payment is due December 31, 2022, and the prevailing rate of
interest for this type of note at date of issuance is 12%.

The interest expense to be reported by Park in its 2023 income statement is

a. P37,969 b. P31,969 c. P30,301 d. P27,901

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5. House Publishers offered a contest in which the winner would receive P1 million
payable over 20 years. On December 31, 2022, House announced the winner of
the contest and signed a note payable to the winner for P1 million, payable in
P50,000 installments every January 2. Also on December 31, 2022, House
purchased an annuity for P418,250 to provide the P950,000 prize monies
remaining after the first P50,000 installment, which was paid on January 2,
2023.

In its 2022 profit or loss, what should House report as contest prize expense?
a. P0 b. P418,250 c. P468,250 d. P1,000,000

Use the following information to answer the next two questions:

Funan Industries purchases new specialized manufacturing equipment on July 1,
2021. The equipment cash price is P79,000. Funan signs a deferred payment
contract that provides for a down payment of P10,000 and an 8-year note for
P103,472. The note is to be paid in 8 equal annual payments of P12,934. The
payments include 10% interest and are made on June 30 of each year, beginning
June 30, 2022.

6. The carrying amount of the note payable on December 31, 2022 is

a. P62,966 b. P56,329 c. P66,115 d. P59,818

7. The total interest expense for the year ended December 31, 2022 is
a. P6,900 b. P6,599 c. P6,612 d. P5,982

AMORTIZATION SCHEDULE – WITH DISCOUNT ACCOUNT

Date Disc. Amort. Payment C.A
7/1/15 69,000
6/30/16 6,900 12,934 62,966
6/30/17 6,297 12,934 56,329

AMORTIZATION SCHEDULE – W/O DISCOUNT ACCOUNT

Date Disc. Amort. Payment C.A
7/1/15 69,000
6/30/16 12,934 6,900 62,966
6/30/17 12,934 6,297 56,329

8. Misamis Company is indebted to occidental Company under a P5,000,000, 10%

three-year note dated December 31, 2013. Because of financial difficulties,
Misamis owned accrued interest of P500,000 on the note at December 31, 2022.
Under a debt restructuring on December 31, 2022, 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 35%.

In its 2022 income statement Misamis should report gain on extinguishment of

debt at
a. P2,500,000 b. P4,500,000 c. P2,000,000 d. P2,925,000

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9. On December 30, 2022, 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 owned these unsecured creditors a total of P1.2
million. Pale’s ordinary share was trading at P1.25 per share on December 30,
2022.

Pale Corp should report gain on extinguishment of debt at

a. P800,000 b. P720,000 c. P700,000 d. P100,000

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, 2022, the last day of Compostela’s annual reporting period. The
unpaid interest on the restricted loan at this time is P750,000 which is forgiven. The
tax rate is 35%. (Round off present value factors to four decimal places)

10. How much is the gain on extinguishment of debt for the year 2022?
a. P550,000 b. P1,750,040 c. P2,206,720 d. P0

11. How much is the interest expense in 2023?

a. P400,000 b. P531,492 c. P399,996 d. P354,328

12. Due to adverse economic circumstances and poor management, 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, 2022. There is no unpaid interest on
the restructured loan at this time. The tax rate is 35%. (Round off present value
factors to four decimal places)
How much is the carrying amount of the note on December 31, 2023?
a. P4,000,000 b. P4,700,500 c. P4,666,667 d. P4,910,000

13. On December 31, 2022, 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
• 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 reducing 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 2022 from this troubled debt
restructuring?
a. P100,000 b. P200,000 c. P213,024 d. P313,024

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MULTIPLE CHOICE THEORY
1. When a note payable is issued for property, goods, or services, the present value
of the note is measured by
a. The fair value of the property, goods, or services.
b. The fair value of the note.
c. Using an imputed interest rate to discount all future payments on the note.
d. Any of these.

2. When a note payable is exchanged for property, goods, or services, the stated
interest rate is presumed to be fair unless
a. No interest rate is stated.
b. The stated interest rate is unreasonable.
c. The stated face amount of the note is materially different from the current
cash sales price for similar items or from current fair value of the note.
d. Any of these.

3. 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.

4. 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 c. Debt for equity swap
b. Shared-based payment d. Swaptions

5. IFRIC 19 Extinguishing Financial Liabilities with Equity Instruments does not

apply to transactions in situations where
a. The creditor is also a direct or indirect shareholder and is acting in its capacity
as a direct or indirect existing shareholder.
b. The creditor and the entity are controlled by the same party or parties before
and after the transaction and the substance of the transaction includes an
equity distribution by, or contribution to, the entity.
c. Extinguishing the financial liability by issuing equity shares is in accordance
with the original terms of the financial liability.
d. All of the above.

6. 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. Even if the fair value of the equity instruments issued can be reliably
measured, the equity instruments shall be measured to reflect the fair value of
the financial liability extinguished.

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FAR Integrated Review Course

d. If only part of the financial liability is extinguished, the entity shall assess
whether some of the consideration paid relates to a modification of the terms
of the liability that remains outstanding.

7. The difference between the carrying amount of the financial liability extinguished,
and the consideration paid, shall be recognized in
a. Profit or loss c. Equity
b. Other comprehensive income d. Either a or b

8. An entity shall disclose a gain or loss recognized in debt for equity swaps as a
separate line item in
a. Profit or loss c. Other comprehensive income
b. The notes to financial statements. d. Either a or b

9. In a debt extinguishment in which the debt is settled by a transfer of assets with

a fair value less than the carrying amount of the debt, the debtor would
recognize
a. No gain or loss on the settlement. c. A loss on the settlement.
b. A gain on the settlement. d. None of these.

10. In a debt settlement in which the debt is continued with modified terms, a
gain should be recognized at the date of settlement whenever the
a. Carrying amount of the debt is less than the total future cash flows.
b. Carrying amount of the debt is greater than the present value of the future
cash flows.
c. Present value of the debt is less than the present value of the future cash
flows.
d. Present value of the debt is greater than the present value of the future cash
flows.

11. An extinguishment of bonds payable, which were originally issued at a

premium, is made by purchase of the bonds between interest dates. At the time
of reacquisition
a. Any costs of issuing the bonds must be amortized up to the purchase date.
b. The premium must be amortized up to the purchase date.
c. Interest must be accrued from the last interest date to the purchase date
d. .All of these.

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