DEBT RESTRUCTURING
PROBLEM 1: Asset Swap
1) IFRS
Total CA of Liability (5,000,000 + 600,000) 5,600,000
CA of Equipment (4,000,000 – 400,000) (3,600,000)
Gain on Extinguishment 2,000,000
Note Payable 5,000,000
Accrued interest 600,000
Accumulated Depreciation 400,000
Equipment 4,000,000
Gain on Extinguishment 2,000,000
2) US GAAP
FV of Equipment 4,500,000
CA of Equipment (4,000,000 – 400,000) (3,600,000)
Gain on Exchange 900,000
Total CA of Liability (5,000,000 + 600,000) 5,600,000
FV of Equipment (4,500,000)
Gain on Debt Restructuring 1,100,000
Note Payable 5,000,000
Accrued interest 600,000
Accumulated Depreciation 400,000
Equipment 4,000,000
Gain on Exchange 900,000
Gain on Debt Restructuring 1,100,000
PROBLEM 2: Equity Swap
1. FV of Shares
Total CA of Liability (5,000,000 + 500,000) 5,500,000
Equity Instruments (35,000 shares x P130) (4,550,000)
Gain on Extinguishment of Debt 950,000
Note payable 5,000,000
Accrued interest 500,000
Share capital (35,000 shares x P100) 3,500,000
Share premium 1,050,000
Gain on extinguishment 950,000
2. FV of Liability
Total CA of Liability (5,000,000 + 500,000) 5,500,000
Equity Instruments (4,700,000)
Gain on Extinguishment of Debt 800,000
Note payable 5,000,000
Accrued interest 500,000
Share capital (35,000 shares x P100) 3,500,000
Share premium 1,200,000
Gain on extinguishment 800,000
3. CA of Liability
Total CA of Liability (5,000,000 + 500,000) 5,500,000
Equity Instruments (5,000,000)
Gain on Extinguishment of Debt 0
Note payable 5,000,000
Accrued interest 500,000
Share capital (35,000 shares x P100) 3,500,000
Share premium 2,000,000
PROBLEM 3: Modification of Terms (NO SUBSTANTIAL MODIFICATION)
CA of liability (5,000,000 + 500,000) 5,500,000
Less:
PV of New Liability (original IR):
PV of principal (5,000,000 x 0.68) 3,400,000
PV of int. payments (5,000,000 x 14% x 3.17) 2,219,000 (5,619,000)
Loss on modification (119,000)
Less: Modification costs (290,000)
Net loss on modification (409,000)
409,000 / 5,500,000 = 7.4% NO SUBSTANTIAL MODIFICATION
January 1, 2024:
Accrued interest payable 500,000
Loss on modification 119,000
Premium on note payable 619,000
#
Premium on note payable 290,000
Cash 290,000
#
Face amount of note payable 5,000,000
Premium on note payable (619,000 – 290,00) 329,000
CA of note payable – Jan. 1, 2024 5,329,000
Date Interest Expense Interest Paid Premium PV/CA
12% 14% Amortization
January 1, 2024 - - - 5,329,000
December 31, 2024 639,480 700,000 60,520 5,268,480
December 31, 2025 632,218 700,000 67,782 5,200,698
December 31, 2024:
Interest expense 639,480
Premium on notes payable 60,520
Cash 700,000
#
December 31, 2025:
Interest expense 632,218
Premium on notes payable 67,782
Cash 700,000
#
PROBLEM 4: Modification of Terms (WITH SUBSTANTIAL MODIFICATION)
CA of liability (5,000,000 + 600,000) 5,600,000
Less:
PV of New Liability (original IR):
PV of principal (5,000,000 x 0.57) 2,850,000
PV of int. payments (5,000,000 x 8% x 3.60) 1,440,000 (4,290,000)
Gain on modification 1,310,000
Less: Modification costs (100,000)
Net gain on modification 1,210,000
1,210,000 / 5,600,000 = 21.6% WITH SUBSTANTIAL MODIFICATION
TRADITIONAL APPROACH CONTEMPORARY APPROACH
Total CA of liability (5M + 600K) 5,600,000 Total CA of liability (5M + 600K) 5,600,000
PV of New Liab. (using original IR): PV of New Liab. (using New EIR):
PV of principal (5,000,000 x 0.57) 2,850,000 PV of principal (5,000,000 x 0.62) 3,100,000
PV of int. payments (5M x 8% x 3.60) 1,440,000 (4,290,000) PV of int. payments (5M x 8% x 3.79) 1,516,000 (4,616,000)
Gain on extinguishment 1,310,000 Gain on extinguishment 984,000
Modification cost (100,000) Modification cost (100,000)
Net gain in extinguishment 1,210,000 Net gain in extinguishment 884,000
Accrued interest 600,000 Accrued interest 600,000
Discount on note payable 710,000 Discount on note payable 384,000
Gain on extinguishment 1,310,000 Gain on extinguishment 984,000
Gain on extinguishment 100,000 Gain on extinguishment 100,000
Cash 100,000 Cash 100,000
Date Interest Interest Discount PV/CA Date Interest Interest Discount PV/CA
Expense Paid Amortization Expense Paid Amortization
12% 8% 10% 8%
1/1/2024 - - - 4,290,000 1/1/2024 - - - 4,616,000
12/31/2024 514,800 400,000 114,800 4,404,800 12/31/2024 461,600 400,000 61,600 4,677,600
Interest expense 514,800 Interest expense 461,600
Cash 400,000 Cash 400,000
Discount on note payable 114,800 Discount on note payable 61,600
