Problem 1:

Hull Company is indebted to Apex under a P5,000,000, 12%, three-year note dated
December 31, 2023. Because of Hull’s financial difficulties developing in 2025, Hull
Company owed accrued interest of P600,000 on the note on December 31, 2025.

Under a debt restructuring on December 31, 2025, Apex Company agreed to settle the note
and accrued interest for a tract of land having a fair value of P4,500,000. The carrying
amount of the land is P3,600,000.

What amount of pretax gain on extinguishment should Hull Company report as component
of income from continuing operations in 2025?

a.​ 2,000,000
b.​ 1,400,000
c.​ 1,100,000
d.​ 900,000

Solution:
Note payable​ ​ ​ ​ ​ ​ 5,000,000
Accrued interest payable​ ​ ​ ​ 600,000
Total liability​ ​ ​ ​ ​ ​ 5,600,000
Carrying amount of land​ ​ ​ ​ 3,600,000
Gain on extinguishment​ ​ ​ ​ 2,000,000

PFRS 9, paragraph 3.3.3, provides that the difference between the carrying amount of a
financial liability extinguished and the consideration paid, including any noncash asset
transferred or liability assumed shall be recognized in profit or loss.

Problem 2:
Versatile Company, after having experienced financial difficulties in 2025, negotiated with a
major creditor and arrived at an agreement to restructure a note payable on December 31,
2025.

The creditor was owed principal of P3,600,00 and interest of P400,000 but agreed to accept
equipment worth P700,000 and note receivable from a Versatile Company’s customer with
carrying amount of P2,700,000.

The equipment had an original cost of P900,000 and accumulated depreciation of P300,000.

What amount should be recognized as gain from debt extinguishment on December 31,
2025?

a.​ 700,000
b.​ 600,000
c.​ 400,000
d.​ 0

Solution:
Note payable​ ​ ​ ​ ​ ​ ​ ​ 3,600,000
Accrued interest payable​ ​ ​ ​ ​ ​ 400,000
Total liability​ ​ ​ ​ ​ ​ ​ ​ 4,000,000
Assets transferred:
​ Note receivable​ ​ ​ ​ 2,700,000
​ Equipment @ CA (900,000 - 300,000)​ 600,000​ 3,300,000
Gain from debt extinguishment​ ​ ​ ​ ​ 700,000

Problem 3:
Knob Company transferred real estate to Mene Company pursuant to a debt restructuring in
full liquidation of Knob’s liability to Mene:

Carrying amount of liability liquidated​​ ​ ​ 1,500,000

Carrying amount of real estate transferred​ ​ ​ 1,000,000
Fair value of real estate transferred​ ​ ​ ​ 900,000

1.​ Under IFRS, what amount should be reported as gain on extinguishment of liability?
a.​ 600,000
b.​ 500,000
c.​ 100,000
d.​ 900,000

2.​ Under USA GAAP, what amount should be reported as gain or loss on restructuring?
a.​ 600,000 gain
b.​ 500,000 gain
c.​ 100,000 loss
d.​ 0

3.​ Under USA GAAP, what amount should be reported as gain or loss on transfer of real
estate?
a.​ 100,000 loss
b.​ 500,000 gain
c.​ 600,000 gain
d.​ 0

Solution:
Carrying amount of liability​ ​ ​ 1,500,000
Carrying amount of real estate​ ​ 1,000,000
Gain on extinguishment​ ​ ​ 500,000

Carrying amount of liability​ ​ ​ 1,500,000

Fair value of real estate​ ​ ​ 900,000
Gain on restructuring​ ​ ​ ​ 600,000

Fair value of real estate​ ​ ​ 900,000

Carrying amount of real estate​ ​ 1,000,000
Loss on transfer of real estate​ ​ 100,000
Problem 4:
Ace Company entered into a troubled debt restructuring agreement with National Bank.

The bank agreed to accept land with a crying amount of P800,000 and a fair value of
P1,000,000 in exchange for a note payable with a carrying amount of P1,500,000.

Under IFRS, what amount should be reported as a gain on extinguishment of debt?

a.​ 700,000
b.​ 300,000
c.​ 500,000
d.​ 0

Solution:
Carrying amount of note payable​ ​ ​ 1,500,000
Carrying amount of land​ ​ ​ ​ 800,000
Gain on extinguishment ​ ​ ​ ​ 700,000

Problem 5
During 2025, Mann Company experienced financial difficulties and is likely to default on a
P5,000,000, 15% three-year note dated January 1, 2023, payable to Summit Bank.

On December 31, 2025, the bank agreed to settle the note and unpaid interest of P750,000
for 2025 for P4,100,000 cash payable on January 31, 2026.

What amount should be reported as gain from extinguishment of debt in 2025?

a.​ 1,650,000
b.​ 900,000
c.​ 750,000
d.​ 0

Solution:
Note payable​ ​ ​ ​ ​ ​ 5,000,000
Accrued interest payable​ ​ ​ ​ 750,000
Total liability​ ​ ​ ​ ​ ​ 5,750,000
Cash settlement​ ​ ​ ​ ​ 4,100,000
Gain in extinguishment of debt​ ​ ​ 1,650,000
Problem 6
Seal Company is experiencing financial difficulty and is negotiating debt restructuring with its
creditor to relieve its financial stress. Seal has a P2,500,000 note payable to United Bank.

The bank accepted an equity interest in Seal Company in the form of 200,000 ordinary
shares quoted at 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.

1.​ What amount should be recognized as gain from debt extinguishment as a result of
the equity swap?
a.​ 400,000
b.​ 100,000
c.​ 500,000
d.​ 200,000

2.​ What amount should be recognized as share premium from the issuance of the
shares?
a.​ 500,000
b.​ 100,000
c.​ 400,000
d.​ 200,000

3.​ If the shares have no fair value, what amount should be recognized as gain on
extinguishment?
a.​ 200,000
b.​ 300,000
c.​ 400,000
d.​ 500,000

Solution:
Note payable​ ​ ​ ​ ​ 2,500,000
Fair value of shares (200,000 x 12)​ ​ 2,400,000
Gain on debt extinguishment​​ ​ 100,000

Fair value of shares​ ​ ​ ​ 2,400,000

Par value of shares (200,000 x 10)​ ​ 2,000,000
Share premium​ ​ ​ ​ 400,000

Note payable​ ​ ​ ​ ​ 2,500,000

Fair value of note payable​ ​ ​ 2,200,000
Gain on extinguishment​ ​ ​ 300,000

Problem 7
At year-end, Sunshine Company showed the following data with respect to a 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 a 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.

1.​ What amount should be recognized as gain from extinguishment of debt?

a.​ 1,000,000
b.​ 2,000,000
c.​ 950,000
d.​ 800,000

2.​ If the shares do not have fair value, what amount should be recognized as gain from
extinguishment of debt?
a.​ 200,000
b.​ 800,000
c.​ 300,000
d.​ 0

3.​ If both the shares and the note payable do not have fair value, what amount should
be recognized as gain from extinguishment of debt?
a.​ 2,000,000
b.​ 1,500,000
c.​ 1,000,000
d.​ 0

Solution
Note payable​ ​ ​ ​ ​ 5,000,000
Accrued interest payable​ ​ ​ 500,000
Total carrying amount of liability​ ​ 5,500,000
Fair value of shares (35,000 x 130)​ ​ 4,550,000
Gain on extinguishment of debt​ ​ 950,000

Total carrying amount of liability​ ​ 5,500,000

Fair value of note payable​ ​ ​ 4,700,000
Gain on extinguishment of debt​ ​ 800,000

Total carrying amount of liability​ ​ 5,500,000

Par value of shares (35,000 x 100)​ ​ 3,500,000
Share premium​ ​ ​ ​ 2,000,000

Problem 8
Quest 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 instruments
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 P60 market value.

1.​ What amount should be reported as gain on the extinguishment of the note payable?
a.​ 2,100,000
b.​ 1,500,000
c.​ 2,750,000
d.​ 0

2.​ What amount should be reported as total share premium from the issuance of the
preference and ordinary shares?
a.​ 2,750,000
b.​ 4,850,000
c.​ 1,500,000
d.​ 2,100,000

Solution
Note payable​ ​ ​ ​ ​ ​ ​ 6,000,000
Accrued interest payable​ ​ ​ ​ ​ 600,000
Total carrying amount of liability​ ​ ​ ​ 6,600,000
Fair value of shares:
​ Ordinary (300,000 x 10)​ ​ 3,000,000
​ Preference (25,000 x 60)​ ​ 1,500,000​ 4,500,000
Gain on extinguishment​ ​ ​ ​ ​ 2,100,000

Fair value of ordinary shares​ ​ ​ 3,000,000

Par value of ordinary shares (300,000 x 5)​ 1,500,000​ 1,500,000
Fair value of preference shares​ ​ 1,500,000
Par value of preference shares (25,000 x 10) 250,000​ 1,250,000
Total share premium​ ​ ​ ​ ​ ​ 2,750,000

Problem 9
Sunset Company had bonds payable with face amount of P5,000,000 and a carrying amount
of P4,800,000. In addition, unpaid interest on the bonds was accrued in the amount of
P250,0000.

The creditor had agreed to the settlement of the bonds payable in exchange for 50,000
shares of P50 par value.

The shares have no reliable measure of fair value. However, the bonds are quoted at
P3,500,000.
 1.​ What amount should be reported as gain on the extinguishment of the bonds
payable?
a.​ 1,500,000
b.​ 1,300,000
c.​ 1,550,000
d.​ 0

2.​ What amount should be reported as share premium from the issuance of the shares?
a.​ 2,300,000
b.​ 1,000,000
c.​ 1,500,000
d.​ 0

Solution
Carrying amount of bonds payable​ ​ ​ 4,800,000
Accrued interest on bonds payable​ ​ ​ 250,000
Total ​ ​ ​ ​ ​ ​ ​ 5,050,000
Fair value of bonds payable​ ​ ​ ​ 3,500,000
Gain on extinguishment of bonds payable​ ​ 1,550,000

Fair value of bonds payable​ ​ ​ ​ 3,500,000

Par value of shares (50,000 x 50)​ ​ ​ 2,500,000
Share premium​ ​ ​ ​ ​ 1,000,000

Problem 10
Due to extreme financial difficulties, Armada Company had negotiated a restructuring of a
10% P5,000,000 note payable due on December 31, 2025. The unpaid interest on the note
on such date is P500,000.

The creditor had agreed to reduce the face value to P4,000,000, forgive the unpaid interest,
reduce the interest rate to 8% and extend the due date three years from December 31,
2025.

The PV of 1 at 10% for three periods is 0.75 and the PV of an ordinary annuity of 1 at 10%
for three periods is 2.49.

1.​ What amount should be reported as gain on extinguishment of debt in 2025?

a.​ 1,703,200
b.​ 1,203,200
c.​ 2,000,000
d.​ 540,000

2.​ What amount should be reported as interest expense for 2026?

a.​ 320,000
b.​ 379,680
c.​ 400,000
d.​ 500,000
Solution
PV of principal (4,000,000 x .75)​ ​ ​ ​ 3,000,000
PV of annual interest payments (320,000 x 2.49)​ ​ 796,800
Total present value of new liability​ ​ ​ ​ 3,796,800

Note payable - old​ ​ ​ ​ ​ ​ 5,000,000

Accrued interest payable​ ​ ​ ​ ​ 500,000
Total old liability​ ​ ​ ​ ​ ​ 5,500,000
Total present value of new liability​ ​ ​ ​ 3,796,800
Gain on extinguishment of debt​ ​ ​ ​ 1,703,200

Note payable - new​ ​ ​ ​ ​ ​ 4,000,000

Total present value of new liability​ ​ ​ ​ 3,796,800
Discount on note payable​ ​ ​ ​ ​ 203,200

Interest expense for 2026 (10% x 3,796,800)​ ​ 379,680

Problem 11
Granada Company had an overdue 8% note payable to First Bank at P8,000,000 and
accrued interest of P640,000.

As a result of a restructuring agreement on January 1, 2025, First Bank agreed to the

following provisions:
●​ The principal obligation is reduced to P7,000,000
●​ The accrued interest of P640,000 is forgiven
●​ The date of maturity is extended to December 31, 2028
●​ Annual interest of 10% is to be paid for 4 years every December 31

The present value of 1 at 8% for 4 periods is 0.735 and the present value of an ordinary
annuity of 1 at 8% for 4 periods is 3.31.

1.​ What amount should be reported as gain on extinguishment of debt for 2025?
a.​ 1,000,000
b.​ 1,178,000
c.​ 1,640,000
d.​ 538,000

2.​ What amount should be reported as interest expense for 2025?

a.​ 746,200
b.​ 700,000
c.​ 596,960
d.​ 640,000

Solution
PV of principal (7,000,000 x .735)​ ​ ​ ​ 5,145,000
PV of annual interest payments (700,000 x 3.31)​ ​ 2,317,000
Total present value of new liability​ ​ ​ ​ 7,462,000
Note payable - old​ ​ ​ ​ ​ ​ 8,000,000
Accrued interest payable​ ​ ​ ​ ​ 640,000
Total old liability​ ​ ​ ​ ​ ​ 8,640,000
Total present value of new liability​ ​ ​ ​ 7,462,000
Gain on extinguishment of debt​ ​ ​ ​ 1,178,000

Note payable - new​ ​ ​ ​ ​ ​ 7,000,000

Total present value of new liability​ ​ ​ ​ 7,462,000
Premium on note payable​ ​ ​ ​ ​ 462,000