FINANCIAL ACCOUNTING AND REPORTING OTHER LIABILITIES

EXERCISE

NOTE PAYABLE

1. On January 7, 2019, Dean Company discounted its own P150,000 180-day note at Urban
Bank at a discount rate of 15%. Dean r paid the note on the July 6, 2019 due date. Based on
a 360-day year, the effective rate of interest on the borrowing was

a. 15.00% c. 16.11%
b. 16.22% d. 17.65%

2. On July 1, 2019, Cody Company obtained a P1,000,000, 180-day bank loan at an annual rate
of 12%. The loan agreement requires Cody to maintain a P200,000 compensating balance in
its chec ing account at the lending bank. Cody would otherwise maintain a balance of only
P100,000 in this account. The checking a count earns interest at an annual rate of 5%. Based
on a 360-day year, the effective interest rate on the borrowing is

a. 12.22% c. 12.78%
b. 13.33% d. 12.00%

3. Arno Corporation’s liability account balances at June 30, 2018 included a 12% note payable in
the amount of P2,400,000. The note is dated October 1, 2017 and is payable in three equal
a nual payments of P800,000 plus interest. The first interest and principal payment was made
on October 1, 2018. In Arno’s June 30, 2019 statement of financial position, what amount
should be reported as accrued interest payable for this note?

a. P144,000 c. P72,000
b. P 216,000 d. P192,000

4. On September 1, 2018, Cobb Company issued a note payable to Philippine National Bank in
the amount of P1,350,000, bearing interest at 10%, and payable in three equal annual
principal payments of P450,000. On this date, the bank’s prime interest rate was 9%. The first
payment for interest and principal was made on September 1, 2019. At December 31, 2019,
Cobb should record accrued interest payable of

a. P20,250 c. P27,000
b. P30,000 d. P22,500

5. Loob Company frequently borrows from the bank in order to maintain sufficient operating
cash. The following loans were at a 12% interest rate, with interest payable at maturity. Loob
repaid each loan on its scheduled maturity date.

Date of loan Amount Maturity date Term of loan

11/1/2018 400,000 10/31/2019 1 year
2/1/2019 1,200,000 7/31/2019 6 months
5/1/2019 900,000 1/31/2020 9 months

Loob records interest expense when the loans are repaid. As a result, interest expense of
P120,000 was recorded in 2019. If no correction is made, by what amount would 2019 interest
expense be understated?

a. 70,000 c. 64,000
b. 54,000 d. 60,000

6. Included in Witt Company’s liability account balances at December 31, 2019 were the
following:

6% note payable issued October 1, 2018

maturing September 30, 2020 1,000,000
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 8% note payable issued April 1, 2018
maturing April 1, 2020 900,000

Witt’s December 31, 2019 financial statements were issued on March 31, 2020. On January
15, 2020, the entire P900,000 balance of 8% note was refinanced by issuance of a long-term
obligation payable in a lump sum. In addition, on March 15, 2020, Witt consummated a
noncancelable agreement with the lender to refinance the 6%, 1,000,000 note on a long-term
basis. On December 31, 2019, what amount of the notes payable should be classified as
current?

a. 1,000,000 c. 1,900,000
b. 900,000 d. 0

7. Dean Company has P3,000,000 of note payable due June 30, 2020. At the financial statement
date of December 31, 2019, Dean signed an agreement to borrow up to P3,000,000 to
refinance the note payable on a long-term basis. The financing agreement called for borrowing
not to exceed 80% of the value of the collateral Dean was providing. On December 31, 2019,
the value of the collateral was P4,000,000. Under the existing loan facility, Dean has the
discretion to refinance or roll over the note payable for at least twelve months after the end of
reporting period.

On December 31, 2019, what amount of the note payable should Dean report as noncurrent
liability?

a. 4,000,000 c. 3,200,000
b. 3,000,000 d. 0

DEBT RESTRUCTURING

8. Hull Company is indebted to Apex under a P4,000,000, 12%, three-year note dated December
31, 2017. Because of Hull’s financial difficulties developing in 2019, Hull owed accrued
interest of P480,000 on the note at December 31, 2019. Under a troubled debt restructuring
on December 31, 2019, Apex agreed to settle the note and accrued interest for a tract of land
having a fair value of P3,700,000. Hull’s acquisition cost of the land is P3,000,000. Ignoring
income taxes, in its 2019 income statement what amount of total gain should Hull report as
component of income from continuing operations?

a. 780,000 c. 1,000,000
b. 1,480,000 d. 700,000

9. The following information pertains to the transfer of real estate pursuant to a debt restructuring
by Globe company to Smart Corporation in full liquidation of Globe’s liability to Smart:

Carrying amount of liability liquidated 2,300,000

Carrying amount of real estate transferred 1,500,000
Fair value of real estate transferred 1,800,000

What amount of pretax gain should Globe report as component of income from continuing
operations?

a. 800,000 c. 300,000
b. 500,000 d. 0

10. Seal Company is experiencing financial difficulty and is negotiating debt restructuring with its
creditors to relieve its financial stress. Seal has a P5,000,000 note payable to United Bank.
The bank accepted an equity interest in Seal Company in the form of 200,000 ordinary shares
quoted at P24 per share. The par value is P20 per share. The fair value of the note payable
on date of restructuring is P4,500,000. What amount should be recognized as gain from debt
extinguishment as a result of the equity swap?

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 a. 500,000 c. 1,000,000
b. 300,000 d. 200,000

11. Due to adverse economic circumstances and poor management, Tagaytay Highlands
Company has negotiated a restructuring of its 8% P5,000,000 note payable to Second Bank
due on January 1, 2019. There is no accrued interest on the note.

The bank has reduced the principal obligation from P5,000,000 to P4,000,000 and extend the
maturity to 3 years or on December 31, 2021. However, the new interest rate is 14% payable
annually every December 31.

The present value of 1 at 8% for three periods is .79 and the present value of an ordinary
annuity of 1 at 8% for three periods is 2.58.

What is the gain on extinguishment of debt to be recognized for 2019?

a. 0 c. 604,800
b. 395,200 d. 1,000,000

Nos. 12 and 13 are based on the following information:

On December 31, 2019, XYZ Company shows the following balances:

Note payable – due December 31, 2019 – 14% 4,000,000

Accrued interest payable 700,000

XYZ is granted by the creditor the following concessions on December 31, 2019:

1. The accrued interest of P700,000 is forgiven.

2. The principal obligation is reduced to P3,000,000.
3. The new interest rate is 10%.
4. The new date of maturity is December 31, 2023.

The present value of 1 at 14% for 4 periods is 0.5921 and the present value of an ordinary
annuity of 1 at 14% for 4 periods is 2.9137. The present value of 1 at 10% for 4 periods is
0.683 and the present value of an ordinary annuity of 1 at 10% for 4 periods is 3.17.

12. The gain on extinguishment of debt is

a. 1,000,000 c. 1,700,000
b. 2,049,590 d. 1,319,600

13. The interest expense in 2021 is

a. 392,346 c. 318,050
b. 381,005 d. 329,844

- End –

Answer Key

Other Liabilities

1. B 6. C 11. A
2. C 7. B 12. B

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3. A 8. B 13. B
4. B 9. A
5. C 10. D