BRIDGING INSTRUCTION PROGRAM

COLLEGE OF ACCOUNTING EDUCATION

1st Semester SY2021-2022

November 11, 2021

MEASUREMENT: FINANCIAL LIABILITIES

not designated at fair value Irrevocably designated at fair value

through P&L through P&L
Initial Measurement
(PFRS 9, paragraph 5.1.1) (PFRS 9, paragraph 4.2.2)

Fair value – Transaction Cost = Issue Fair Value

Price or Net Proceeds
*Transaction cost (expense
immediately)
Conceptually: Present Value

Interest is based on effective rate/real Interest is based on stated

rate rate/nominal rate

Subsequent Measurement (PFRS 9, paragraph 5.3.1)

Amortized Cost Fair Value through Profit or Loss

NOTES PAYABLE
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 market 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 market value of the note.
d. any of these.
3. Discount on Notes Payable is charged to interest expense
a. equally over the life of the note.
b. only in the year the note is issued.
c. using the effective-interest method.
d. only in the year the note matures.

4. On January 1, 2021, Garner Company sold property to Agler Company which

originally cost Garner P760,000. There was no established exchange price for this
property. Agler gave Garner a P1,200,000 zero-interest-bearing note payable in
three equal annual installments of P400,000 with the first payment due December
31, 2021. The note has no ready market. The prevailing rate of interest for a note
of this type is 10%. What is the amount of interest expense that should be
recognized by Agler in 2021, using the effective-interest method?
a. P0.
b. P40,000.
c. P99,480.
d. P120,000.

5. On January 1, 2021, Glenn Company sold property to Henry Company. There was
no established exchange price for the property, and Henry gave Glenn a
P2,000,000 zero-interest-bearing note payable in 5 equal annual installments of
P400,000, with the first payment due December 31, 2021. The prevailing rate of
interest for a note of this type is 9%. What should be the balance of the Discount
on Notes Payable account on the books of Henry at December 31, 2021 after
adjusting entries are made, assuming that the effective-interest method is used?
a. P0
b. P304,091
c. P446,400
d. P558,000
DEBT RESTRUCTURING
6. In a troubled debt restructuring in which the debt is continued with modified terms
and the carrying amount of the debt is less than the total future cash flows,
a. a loss should be recognized by the debtor.
b. a gain should be recognized by the debtor.
c. a new effective-interest rate must be computed.
d. no interest expense or revenue should be recognized in the future.

7. A troubled debt restructuring will generally result in a

a. loss by the debtor and a gain by the creditor.
b. loss by both the debtor and the creditor.
c. gain by both the debtor and the creditor.
d. gain by the debtor and a loss by the creditor.

8. In a troubled debt restructuring in which the debt is settled by a transfer of assets

with a fair market value less than the carrying amount of the debt, the debtor
would recognize
a. no gain or loss on the settlement.
b. a gain on the settlement.
c. a loss on the settlement.
d. none of these.

9. In a troubled debt restructuring in which the debt is continued with modified

terms, a gain should be recognized at the date of restructure, but no interest
expense should be recognized over the remaining life of the debt, whenever the
a. carrying amount of the pre-restructure debt is less than the total future
cash flows.
b. carrying amount of the pre-restructure debt is greater than the total future
cash flows.
c. present value of the pre-restructure debt is less than the present value of
the future cash flows.
d. present value of the pre-restructure debt is greater than the present value
of the future cash flows.

[Link] a troubled debt restructuring in which the debt is continued with modified terms
and the carrying amount of the debt is less than the total future cash flows, the
creditor should
a. compute a new effective-interest rate.
b. not recognize a loss.
c. calculate its loss using the historical effective rate of the loan.
d. calculate its loss using the current effective rate of the loan.
Use the following information for questions *88 through *90:
• On December 31, 2021, Reese Co. is in financial difficulty and cannot pay a note
due that day. It is a P600,000 note with P60,000 accrued interest payable to
Trear, Inc. Trear agrees to accept from Reese equipment that has a fair value of
P290,000, an original cost of P480,000, and accumulated depreciation of
P230,000. Use USA GAAP.

[Link] should recognize a gain or loss on the transfer/exchange of the equipment

of
a. P0.
b. P40,000 gain.
c. P60,000 gain.
d. P190,000 loss.

[Link] should recognize a gain on the settlement/ debt restructuring of the debt
of
a. P0.
b. P15,000.
c. P55,000.
d. P370,000.

[Link] should record interest expense for 2005 of

a. P60,000
b. P15,000.
c. P30,000.
d. P45,000.

• The following information pertains to the transfer of real estate pursuant to a

troubled debt restructuring by Knot Company to Ton Company in full liquidation
of Knot’s liability to Ton:
Carrying amount of liability liquidated P150,000
Carrying amount of real estate transferred 100,000
Fair value of real estate transferred 90,000

[Link] amount should Knot report as gain (loss) on transfer of real estate?
(a) (P10,000) (b) P 0 (c) P50,000 (d) P60,000

[Link] amount should Knot report as pretax gain (loss) on restructuring of

payables?
(a) (P10,000) (b) P 0 (c) P50,000 (d) P60,000
[Link] Company is experiencing financial difficulty and is negotiating debt
restructuring with its creditors to relieve its financial stress. Style has a
P2,500,000 note payable to United Bank. The bank is considering acceptance of
an equity interest in Style Company in the form of 200,000 shares of common
stock valued at P12 per share. The par value of common is P10 per share. How
much is the gain from extinguishment of debt?
(a) P500,000 (b) P100,000 (c) P400,000 (d)P0

[Link] December 31, 2021, Fire Company was experiencing financial difficulties and
entered into a debt restructuring agreement with the creditor. The creditor
restructured the obligation as follows:
a. Reduced the principal note payable from P5,000,000 to P4,500,000.
b. Forgave P600,000 of accrued interest.
c. Extended the maturity date from December 31, 2021 to December 31, 2024.
d. Reduced the interest from 12% to 10%. Interest was payable annually on
December 31, 2022, 2023 and 2024.
Fire should report loss on debt restructuring of:
(a) P250,000 (b) P850,000 (c) P500,000 (d)P 0
OPERATING LEASE
1. If the lessor records the unearned rent at the inception of a lease, then the lease
must:
(a) be an operating lease
(b) be a direct financing lease
(c) contains a bargain purchase option
(d) be an annuity due

2. When a nonrefundable down payment on a leased asset is made in advance under

an operating lease, at the payment date, the lessor credits:
(a) lease liability
(b) unearned rent
(c) cash
(d) rent revenue

3. The basic accounting issue for lessors is:

(a) computing depreciation on the leased asset
(b) revenue recognition during the lease term
(c) determination of the cost of the leased asset
(d) expense recognition during the lease term

4. Which of the following is the complete list of classifications of leases from the
standpoint of the lessor?
(a) direct financing, sales type, and operating
(b) direct financing, sales type, and leveraged
(c) direct financing, and sales type
(d) direct financing, operating
• On January 1,2021, Candor Company purchased an equipment for P3,000,000
cash for the purpose of leasing it. The equipment is expected to have a 10-year
life and no residual value. On April 1,2021, it leased the equipment to Brave
Corporation for 3 years at a monthly rental of P50,000 payable at the beginning
of every month. On the same date, it also received a security deposit of P600,000
to be refunded upon the lease expiration.

In addition to the rental, Candor received from Brave a lease bonus of P120,000
on January 1,2021. On April 1,2021, Candor paid initial direct cost of P300,000.
Such costs are directly attributable to negotiating and arranging the operating
lease. During the year, Candor paid repair and maintenance of P20,000. The lease
bonus is amortized over 3 years or P40,000 annually. The equipment is
depreciated over 10 years.

5. As an inducement to enter a lease, Arts, Inc. a lessor, grants Hompson

Corporation, a lessee, nine months of free rent under a five year operating lease.
The lease is effective on July 1, 2020 and provides for monthly rental of P10,000
to begin April 1, 2021.
In Hompson’s income statement for the year ended June 30, 2021, rent
expense should be reported as:
(a) P102,000 (b) P90,000 (c) P30,000 (d) P25,500
6. Kay Company, a lessor of office machines, purchased a new machine for P600,000
on January 1, 2021, which was leased the same day to Lee. The machine will be
depreciated at P55,000 per year. The lease is for a four-year period expiring
January 1, 2025, and provides for annual rental payments of P100,000 beginning
January 1, 2021. Additionally, Lee paid P64,000 to Kay as a lease bonus. In its
2021 income statement, what amount of revenue and expense should Kay report
on this leased asset?
Revenue Expense Revenue Expense
(a) P100,000 P0 (c) P116,000 P55,000
(b) P116,000 P0 (d) P164,000 P55,000