NAME: __________________________________________ SECTION: ____________

PROBLEM 1
Hilaga Company is experiencing financial difficulty and is negotiating debt restructuring with its creditor
to relieve its financial stress. Hilaga has a P2,500,000 note payable to North Bank. The bank accepted
an equity interest in Hilaga Company in the form of 200,000 ordinary shares quoted at P12 per share.
The par value is P10 per share. The fair value of the note payable on the date of restructuring is
P2,200,000
Prepare journal entries on the books of Hilaga Company to record the settlement of note payable:
1. If the fair value of the equity instrument is used.
2. If the fair value of the liability is used
3. If the carrying amount of the financial liability is used

PROBLEM 2
On December 31, 2013, Silangan Company showed the following data with respect to matured
obligation:
Note 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 into an agreement with the creditor for the issuance of share capital in full settlement of the
note payable. The agreement provided for the issue of 35,000 shares with par value of P100. The share
is currently quoted at P130. The fair value of the note payable on the date of restructuring is P4,700,000.
Under the “equity swap”, what amount should be recognized as gain from extinguishment of debt?

PROBLEM 3
Timog company is threatened with bankruptcy due to its inability to meet interest payments and fund
requirements to retire P6,000,000 note payable with accrued interest payable of P600,000. The entity
has entered into an agreement with the creditor to exchange equity instrument for the liability. The
terms of the exchange are 300,000 ordinary shares with P5 par value and P10 market value, and
25,000 preference shares with P10 par value and market value. Prepare journal entries on the books
of Timog Company to record the settlement of note payable assuming the fair value of the liability is
used.

PROBLEM 4
On January 1, 2017, West Company had an overdue 10% note payable to Kanluran bank at P7,000,000
and accrued interest of 700,000. As a result of a restructuring agreement of January 1, 2017. Kanluran
bank agreed to the following provisions:
The principal amount is reduced to 5,000,000; The annual interest of 12% is to be paid for 4 years
every December 31; The accrued interest of 700,000 is forgiven; The date of maturity is extended to
December 31, 2020.
The present value of 1 at 10% for 4 periods is .683 and the present value of an ordinary annuity of 1 at
10% for 4 periods is 3.17.
1. What is the present value of the new note payable on January 1, 2017?
2. What is the gain on extinguishment of debt to be recognized for 2017?
3. What is the interest expense to be recognized for 2017?
4. Prepare journal entries for the payment if interest on December 3, 2017 and amortization of
premium/ discount on note payable for 2017

PROBLEM 5
On December 31, 2011, Short Co. is in financial difficulty and cannot pay a note due that day. It is a
P750,000 note with P75,000 accrued interest payable to Bryan, Inc. Bryan agrees to forgive the accrued
interest, extend the maturity date to December 31, 2013, and reduce the interest rate to 4%. The
present value of the restructured cash flows is P642,000.
Prepare entries for the following:
1. The restructure on Short’s books.
2. The payment of interest on December 31, 2012.
3. The restructure on Bryan’s books.

PROBLEM 6
On January 1, 2013. Earth Company entered into a debt restructuring agreement with Mundo Company
which was experiencing financial difficulties. Earth Company restructures a P1,000,000 note receivable
as follows:
 Reduced principal obligation to P700,000
 Forgave P120,000 of accrued interest
 Extended the maturity date from January 1, 2013 to December 31, 2014.
 Record the interest rate from 12% to 8%. Interest is payable annually on December 31, 2013
and 2014.
Relevant present value factors:
Single sum, two years at 8% .857
Single sum, two years at 12% .797
Ordinary annuity, two years at 8% 1.783
Ordinary annuity, two years at 12% 1.690
1. What is the total present value of note receivable?
2. What is the impairment loss on the note receivable for 2013?
3. What is the interest income for 2013?