MODULE 2

NOTES PAYABLE
& DEBT
RESTRUCTURIN
G

Daizy Marie P. Nicart, CPA

 PROMISSORY NOTE
A promissory note is an unconditional promise in
writing made by one person to another, signed by the
maker, engaging to pay on demand or at a fixed or
determinable future time a sum certain in money to
order or to bearer.
A note payable not designated at fair value through profit or
loss shall be measured initially at fair value minus transaction
costs that are directly attributable to the issue of a note
payable.

• Transaction costs are included in the measurement of note INITIAL

payable
• If the note payable is irrevocably designated at fair value
MEASUREMEN
through profit or loss, the transaction costs are expensed T OF NOTES
immediately.
PAYABLE
Fair value  equal to the present value of the future cash
payment to settle the note payable using market rate of
interest
 PRESENT VALUE OF
NOTES PAYABLE
NOTES ISSUED FOR CASH
• Present Value is equal to the Cash
Proceeds
INTEREST BEARING NOTE
 Present Value is equal to Face
Value

NON INTEREST BEARING

NOTE
1. Cash price
2. Present value of all collections
 Illustration 1 : NOTE ISSUED FOR
CASH
On November 1, 2020, an entity Journal Entry : December 31, 2020
discounted its own note of P1,000,000 Interest Expense 20,000
at 12% for one year.
Discount on Notes Payable 20,000
(120,000 x 2/12)
Note Payable 1,000,000
Less: Discount (12% x 1,000,000) 120,000
FS Presentation : Dec. 31, 2020
Net Proceeds 880,000
Note Payable 1,000,000
Journal Entry : Nov. 1, 2020 Discount on Note Payable (100,000)
Cash 880,000 Carrying Amount 900,000
Discount on Notes Payable 120,000 *The Discount on Note Payable is a direct deduction from the
Note Payable face amount of the Note Payable
1,000,000
 Illustration 2 : INTEREST BEARING
NOTE Dec. 31, 2020 : Payment of First installment & Interest
On January 1, 2020, an entity acquired an
equipment for P1,000,000 payable in 5 Interest Expense (10% x 1M) 100,000
equal installments every December 31 of
Note Payable 200,000
each year. Interest is 10% on the unpaid
balance. Cash 300,000

Journal Entry : Jan. 1, 2020 Dec. 31, 2021 : Payment of Second Installment & Interest
Equipment 1,000,000 Interest Expense (10% x 800,000) 80,000
Note Payable 1,000,000 Note Payable 200,000
Cash 280,000
 Illustration 3 : NON INTEREST
BEARING NOTE
Dec. 31, 2020 : Payment of Annual Installment
On January 1, 2020, an entity acquired an
equipment with a cash price of P350,000 Note Payable 100,000
for P500,000, P100,000 down and the
balance payable in 4 equal annual Cash 100,000
installments.
Dec. 31, 2021 : Amortization of the discount for 2020

Interest Expense (10% x 800,000) 60,000

Journal Entry : Jan. 1, 2020 Discount on Note Payable 60,000
Equipment 350,000
Discount on Notes Payable *The amortization is based on Notes Payable Outstanding
150,000 Balance method.
Cash 100,000
Note Payable 400,000
 Illustration 4 : NON INTEREST BEARING
NOTE (No Cash Price)
Journal Entry : Jan. 1, 2020
On January 1, 2020, an entity acquired an
equipment for P1,000,000 payable in 5 equal Equipment 758,160
annual installments on every December 31 of Discount on Notes Payable 241,840
each year. Note Payable 1,000,000
Note that there is no agreed interest and no cash price is December 31, 2020
available for the equipment. In such a case, the cost of the
Note Payable 200,000
equipment is equal to the present value of the P200,000
annual installments in 5 years at an appropriate rate of 10%. Cash 200,000

The present value of an ordinary annuity of 1 for 5 years at

10% is 3.7908. Interest Expense 75,816
Discount on Note Payable 75,816
Therefore, the present value of five P200,000 installments is Ta b le o f Am o rtiza tio n
P758,160, computed by multiplying P200,000 by the present Da te Pa ym e n t In te re st Prin c ip a l Pre se n t Va lu e
value factor of 3.7908. Ja n . 1, 2020 758,160
De c . 31, 2020 200,000 75,816 124,184 633,976
De c . 31, 2021 200,000 63,398 136,602 497,374
De c . 31, 2022 200,000 49,737 150,263 347,111
De c . 31, 2023 200,000 34,711 165,289 181,822
De c . 31, 2024 200,000 18,178 181,822 -
TO TALS 1,000,000 241,840 758,160
 Illustration 4 : NON INTEREST BEARING
NOTE (No Cash Price)
PRESENTATION OF THE NOTES PAYABLE IN THE STATEMENT OF FINANCIAL
POSITION AS OF DECEMBER 31, 2020

FS Presentation : Dec. 31, 2020

On January 1, 2020, an entity acquired an equipment for CURRENT LIABILITY
P1,000,000 payable in 5 equal annual installments on every
December 31 of each year. Note Payable 200,000
Discount on Note Payable (63,398)
Ta b le o f Amo rtiza tio n Carrying Amount – Amortized Cost 136,602
Da te Pa yme n t In te re st Prin c ip a l Pre se n t Va lu e
Ja n . 1, 2020 758,160
De c . 31, 2020 200,000 75,816 124,184 633,976
NONCURRENT LIABILITY
De c . 31, 2021 200,000 63,398 136,602 497,374
De c . 31, 2022 200,000 49,737 150,263 347,111 Note Payable 600,000
De c . 31, 2023 200,000 34,711 165,289 181,822
De c . 31, 2024 200,000 18,178 181,822 - Discount on Note Payable (102,606)
TOTALS 1,000,000 241,840 758,160
Carrying Amount – Amortized Cost 497,374
 Illustration 5 : NONINTEREST BEARING
NOTE PAYABLE LUMP SUM
On January 1, 2020, an entity acquired an equipment Journal Entry : January 1, 2020
for P1,000,000. The entity paid P100,000 down and Equipment 776,170
signed a noninterest bearing note for the balance
which is due after three years on January 1, 2023. Discount on Note Payable 223,830

There was no established cash price for the Cash 100,000

equipment. The prevailing interest rate for this type Note Payable 900,000
of note is 10%. The present value of 1 for 3 periods
is .7513. December 31, 2020 : Interest Expense Recognition

Down payment Interest Expense 67,617

100,000
Discount on Note Payable 67,617
Present value of note (P900,000 x .7513) 676,170
Cost of equipment 776,170 In te re st Disc o un t o n
Pre se nt Va lue
Da te Exp e n se No te s Pa ya b le
Ja n. 1, 2020 223,830 676,170
Face value of note De c . 31, 2020 67,617 156,213 743,787
900,000
De c . 31, 2021 74,379 81,834 818,166
Present value of note 676,170 De c . 31, 2022 81,834 - 900,000
Imputed Interest TOTALS 223,830 238,047
223,830
 FAIR VALUE OPTION OF
MEASURING NOTE PAYABLE
PFRS 9, paragraph 4.2.2 provides that at initial recognition, a
note payable may be irrevocably designated as at fair value
through profit or loss.
Gain or loss shall be accounted for as :
 Change in fair value attributable to the credit risk is recognized in other
comprehensive income
 Remaining amount of the change in fair value is recognized in profit or
loss.
Under the fair value option, any transaction cost is recognized as
outright expense.
There is no amortization of discount and premium on note
payable.
 Illustration 6 : FAIR VALUE OPTION OF
MEASURING NOTE PAYABLE
Journal Entry : January 1, 2020
On January 1, 2020, an entity borrowed from a bank
Cash 4,000,000
P4,000,000 on as 12% 5-year interest bearing note.
Note Payable 4,000,000
The entity received P4,000,000 which is the fair value of
the note on January 1, 2020. Transaction cost of
P100,000 was paid by the entity. Transaction Cost 100,000
Cash 100,000
The fair value of the note payable was P3,500,000 on
December 31, 2020
December 31, 2020.
Interest Expense (12% x 4M) 480,000
The entity has elected irrevocably the fair value option
Cash 480,000
for measuring note payable.
The change in fair value comprised P50,000 attributable
to credit risk and P450,000 attributable to interest risk. Note Payable 500,000
Gain from Change in Fair Value 450,000
Carrying Amount 4,000,000
Gain from credit risk – OCI 50,000
Fair Value – December 31, 2020 3,500,000
*The Gain from Change in Fair Value is recognized in Profit or Loss
Decrease in FV of Liability – Gain 500,000 *The Gain from Credit Risk is recognized in other comprehensive income
SAMPLE EXERCISES
Please get your calculator, ballpen and paper
PROBLEM 1

Ontario Company, a natural energy supplier, borrowed P8,000,000 cash on November 1,

2020 to fund a geological survey. The loan was granted by United Bank under a short-term
credit line. Ontario issued a 9-month, 12% promissory note with interest payable at
maturity. The fiscal period is the calendar year.

Required:
1. Prepare the journal entry for the issuance of the note payable by Ontario Company.
2. Prepare the appropriate adjusting entry for the note payable on December 31, 2020.
3. Prepare the journal entry for the payment of the note payable at maturity.
PROBLEM 2

North Company acquired a machinery with cash price of P750,000 for P1,000,000.

The entity paid P200,000 and signed a noninterest bearing promissory note for the balance
which is payable in 4 equal installments every December 31 of each year.

Required:
Prepare journal entries for 2020.
PROBLEM 3

On January 1, 2020, Lizelle Company received P1,000,000 on a non-interest bearing note due in three years. The
market rate of interest on such date is 10%.

The entity irrevocably elected the fair value option in measuring the note payable.

On December 31, 2020, the risk factors indicated that the rate of interest applicable to the borrowing was 9%. The
present value factors at 10% and 9% are:

PV factor 10%, 3 periods .751 PV factor 9%, 3 periods .772

PV factor 10%, 2 periods .826 PV factor 9%, 2 periods .842
PV factor 10%, 1 period .909 PV factor 9%, 1 period .917

1. What is the initial carrying amount of the note payable on January 1, 2020?
2. What is the carrying amount of the note payable on December 31, 2020?
3. What amount of net gain or loss from the change in fair value of the note payable should be reported for 2020?
EXERCISE NO. 4

On September 1, 2018, YXY Company issued a note payable in the amount of

P1,800,000, bearing interest at 12%, and payable in three equal annual principal
payments of P600,000. The first interest and principal payment was made on
September 1, 2019.

1. On December 31, 2019, what amount should be reported as accrued interest

payable?

2. What is the interest expense that should be recorded by YXZ Company for the year
2019?
EXERCISE NO. 5

On January 1, 2018, ABC Company lent P1,780,000 cash to Stone Company. The
promissory note made by Stone for P2,000,000 did not bear explicit interest and was
due on December 31, 2019. The prevailing interest rate for a loan of this type was
6%. The present value of 1 for two periods at 6% is .89.

1. What amount of interest expense should be recognized for 2018?

2. What is the carrying amount of the Notes Payable on Dec. 31, 2018?
 ASSIGNMENT:
PLEASE REFER TO LMS FOR YOUR
ASSIGNMENT
 DEBT
RESTRUCTURIN
G

Daizy Marie P. Nicart, CPA

DEBT
RESTRUCTURING
Debt restructuring is a situation where the creditor, for
economic or legal reasons related to the debtor’s
financial difficulties, grants to the debtor concession that
would not otherwise be granted in a normal business
relationship.
 TYPES OF DEBT
RESTRUCTURING

ASSET SWAP

EQUITY SWAP

MODIFICATION OF TERMS
 ASSET SWAP

Asset swap is the transfer by the debtor to the creditor of

any asset in full payment of the obligation

 Asset swap is treated as a derecognition of a financial

liability or extinguishment of an obligation.

 The difference between the carrying amount of the financial

liability and the consideration given shall be recognized in
profit or loss.

Dacion en pago is a form of asset swap.

 Illustration 1 : Asset Swap
An entity provided the following balances at year end:
Note Payable 2,000,000 Journal Entry
Note Payable 2,000,000
Accrued Interest Payable 400,000
Accrued Interest Payable 400,000
At year end, the entity transferred to the creditor land Land 1,500,000
with carrying amount of P1,500,000 and fair value of Gain on Extinguishment of debt 900,000
P2,200,000.

Notes Payable 2,000,000

Accrued Interest Payable 400,000
Total Liability 2,400,000
Less : Carrying Amount of Land 1,500,000
Gain on extinguishment of debt 900,000
 Illustration 1 : Asset Swap (USA GAAP)
Under USA GAAP, asset swap is recorded as if two transactions have taken place, namely the sale of the asset and
the extinguishment of the liability. Accordingly, two gains or losses are recognized.
Fair Value of Land 2,200,000
An entity provided the following balances at year end: Carrying Amount of Land 1,500,000
Note Payable 2,000,000 Gain on Exchange 700,000
Accrued Interest Payable 400,000
At year end, the entity transferred to the creditor land
Note Payable 2,000,000
with carrying amount of P1,500,000 and fair value of
P2,200,000. Accrued Interest Payable 400,000
Total Liability 2,400,000

Journal Entry Fair value of land 2,200,000

Note Payable 2,000,000 Gain on Debt Restructuring 200,000
Accrued Interest Payable 400,000
*The difference between the fair value of the asset and the carrying
Land 1,500,000
amount is Gain or Loss on Exchange.
Gain on Exchange 700,000
*The difference between the carrying amount of the liability and the
Gain on Debt Restructuring 200,000
fair value of the asset is gain or loss from restructuring.
 Illustration 2 : Dacion en Pago accounting
Dacion en pago arises when a mortgaged property is offered by the debtor in full settlement of the debt. The
transaction shall be accounted for as an “asset swap” form of debt restructuring.

Land costing P500,000 and building costing P4,000,000

with accumulated depreciation of P800,000, were Total Liability 3,250,000
mortgaged to secure a bank loan of P3,000,000. Less : Carrying amount of land and building
3,700,000
(500,000 + 3,200,000)
Loss on extinguishment of debt (450,000)
Face amount of the loan 3,000,000
Accrued interest payable 200,000
Journal Entry
Legal Fee and bank service charges 50,000
Mortgage Payable 3,000,000
Accrued Interest Payable 200,000
Subsequently, the land and building were given to the bank Bank service charge 50,000
in full payment of the liability.
Loss on extinguishment of debt 450,000
Accumulated depreciation 800,000
*If the balance of the obligation including accrued interest and
other charges is more than the carrying amount of the property Land 500,000
mortgaged, there is a gain on extinguishment of debt. Building 4,000,000
 EQUITY SWAP
Is a transaction whereby a debtor and creditor may renegotiate
the terms of a financial liability with the result that the liability
is full or partially extinguished by the debtor issuing equity
instruments to the creditor.

Simply, equity swap is the issuance of share capital by the

debtor to the creditor in full or partial payment of an obligation.
 INITIAL MEASUREMENT OF
EQUITY INSTRUMENTS
ISSUED TO EXTINGUISH A
FINANCIAL LIABILITY
1 Fair value of equity instruments issued

Fair value of liability extinguished

2

Carrying amount of liability

3 extinguished
 Illustration : EQUITY SWAP
PRIORITY 1 : FAIR VALUE OF SHARES ISSUED
An entity showed the following data at year end: Fair Value of Shares Issued 4,500,000
Par value of shares issued 2,000,000
Share Premium 2,500,000
Bonds Payable 5,000,000
Accrued interest payable 500,000 Bonds Payable 5,000,000
Accrued Interest Payable 500,000
Carrying Amount of Bonds Payable 5,500,000
The entity issued share capital with a total par value of
Fair Value of Shares Issued 4,500,000
P2,000,000 and fair value of P4,500,000 in full
settlement of the bonds payable and accrued interest. Gain on Extinguishment of Debt 1,000,000

Journal Entry

On the other hand, the fair value of the bonds payable is Bonds Payable 5,000,000
P4,700,000. Accrued Interest Payable 500,000
Share Capital 2,000,000
Share Premium 2,500,000
Gain on Extinguishment of Debt 1,000,000
 Illustration : EQUITY SWAP
PRIORITY 2 : FAIR VALUE OF BONDS PAYABLE
ISSUED
An entity showed the following data at year end: Fair Value of Bonds Payable 4,700,000
Par value of shares issued 2,000,000
Share Premium 2,700,000
Bonds Payable 5,000,000
Accrued interest payable 500,000 Bonds Payable 5,000,000
Accrued Interest Payable 500,000
Carrying Amount of Bonds Payable 5,500,000
The entity issued share capital with a total par value of
Fair Value of Bonds Payable 4,700,000
P2,000,000 and fair value of P4,500,000 in full
settlement of the bonds payable and accrued interest. Gain on Extinguishment of Debt 800,000

Journal Entry

On the other hand, the fair value of the bonds payable is Bonds Payable 5,000,000
P4,700,000. Accrued Interest Payable 500,000
Share Capital 2,000,000
Share Premium 2,700,000
Gain on Extinguishment of Debt 800,000
Illustration : EQUITY SWAP
PRIORITY 3 : CARRYING AMOUNT OF BONDS PAYABLE ISSUED

An entity showed the following data at year end: Carrying Amount of Bonds Payable 5,500,000
Par value of shares issued 2,000,000
Share Premium 3,500,000
Bonds Payable 5,000,000
Accrued interest payable 500,000
Journal Entry
The entity issued share capital with a total par value of Bonds Payable 5,000,000
P2,000,000 and fair value of P4,500,000 in full Accrued Interest Payable 500,000
settlement of the bonds payable and accrued interest. Share Capital 2,000,000
Share Premium 3,500,000

On the other hand, the fair value of the bonds payable is

P4,700,000.
 MODIFICATION OF TERMS
Modification may involve either the interest, maturity value,
or both.

Interest concession may involve a reduction of interest rate,

forgiveness of unpaid interest or a moratorium on interest.

Maturity value concession may involve an extension of the

maturity date or a reduction of the principal amount.
MODIFICATION OF TERMS
 Substantial modification of terms of an existing financial liability
shall be accounted for as an extinguishment of the old financial
liability and the recognition of a new financial liability.

 Substantial modification of terms : if the gain or loss on

extinguishment is at least 10% of the old financial liability.

 The difference between the carrying amount of the old liability and
the present value of new or restructured liability (using the old
effective rate ) shall be accounted for as gain or loss on
extinguishment of debt.

 Any costs or fees incurred as a result of the substantial modification

of terms shall be recognized as part of gain or loss on
extinguishment.
Illustration1: MODIFICATION OF TERMS
SUBSTANTIAL MODIFICATION
On January 1, 2020, an entity showed the following: STEP 1 : COMPUTE THE PRESENT VALUE OF NEW NOTE
PAYABLE (using the old rate of 14%)
PV of principal (4,000,000 x .5921) 2,368,400
Note Payable – due Jan. 1, 2020 – 14% 5,000,000 PV of interest payments (400,000 x 2.9137) 1,165,480
Accrued Interest Payable 1,000,000 Present Value of New Note Payable 3,533,880

STEP 2 : COMPUTE FOR THE DISCOUNT ON NOTE PAYABLE

The entity is granted by the creditor the following concessions on
January 1, 2020: Present Value of New Note Payable 3,533,880

a. The accrued interest of P1,000,000 is forgiven. Face Value of New Note Payable 4,000,000

b. The principal obligation is reduced to P4,000,000. Discount on Note Payable 466,120

c. The new interest rate is 10% payable every December 31. STEP 3 : COMPUTE FOR THE GAIN / LOSS ON
EXTINGUISHMENT OF DEBT
d. The new date of maturity is December 31, 2023.
Carrying Amount of Old Liability (Face Value of
5M + Accrued Interest of 1M) 6,000,000
The present value of 1 at 14% for 4 periods is 0.5921 and the
Present Value of New Note Payable 3,533,880
present value of ordinary annuity of 1 at 14% for 4 periods is
2.9137. Gain on Extinguishment of Debt 2,466,120
 Illustration1: MODIFICATION OF TERMS
SUBSTANTIAL MODIFICATION
Journal Entry to record the extinguishment of the old note payable: STEP 1 : COMPUTE THE PRESENT VALUE OF NEW NOTE
PAYABLE (using the old rate of 14%)
Note Payable – old 5,000,000
PV of principal (4,000,000 x .5921) 2,368,400
Accrued Interest Payable 1,000,000
PV of interest payments (400,000 x 2.9137) 1,165,480
Discount on Note Payable 466,120
Present Value of New Note Payable 3,533,880
Note Payable – new 4,000,000
Gain on extinguishment of debt 2,466,120 STEP 2 : COMPUTE FOR THE DISCOUNT ON NOTE PAYABLE
Present Value of New Note Payable 3,533,880
Face Value of New Note Payable 4,000,000
Journal Entry to record the interest payment on the new note payable for
2020 Discount on Note Payable 466,120
Interest Expense (10% x 4,000,000) 400,000 STEP 3 : COMPUTE FOR THE GAIN / LOSS ON
Cash
EXTINGUISHMENT OF DEBT
400,000
To amortize the discount on note payable for 2020: Carrying Amount of Old Liability (Face Value of
5M + Accrued Interest of 1M) 6,000,000
Interest expense 94,743
Present Value of New Note Payable 3,533,880
Discount on Note Payable 94,743
Gain on Extinguishment of Debt 2,466,120
 Illustration1: MODIFICATION OF TERMS
SUBSTANTIAL MODIFICATION
Journal Entry to record the extinguishment of the old note payable: Journal Entry for 2020 on the books of the creditor:
Note Payable – old 5,000,000 Note Receivable – new 4,000,000
Accrued Interest Payable 1,000,000 Los on debt restructure 2,466,120
Discount on Note Payable 466,120 Note Receivable – old 5,000,000
Note Payable – new 4,000,000 Accrued Interest Receivable 1,000,000
Gain on extinguishment of debt 2,466,120 Unearned Interest Income 466,120

To amortize the discount on note payable for 2020: Journal Entry for 2020 on the books of the creditor:

Interest expense Cash 400.000

94,743
Discount on Note Payable 94,743 Interest Income 400,000
Ta b le o f Amo rtiza tio n
Disc o un t Unearned Interest Income 94,743
Da te Inte re st Pa id Inte re st Exp e nse Amo rtiza tio n Pre se n t Va lue Interest Income 94,743
Ja n. 1, 2020 3,533,880
De c . 31, 2020 400,000 494,743 - 94,743 3,628,623
De c . 31, 2021 400,000 508,007 - 108,007 3,736,630
De c . 31, 2022 400,000 523,128 - 123,128 3,859,759
De c . 31, 2023 400,000 540,241 140,241 4,000,000
TOTALS 1,600,000 2,066,120 - 185,637
Illustration2: MODIFICATION OF TERMS
NO SUBSTANTIAL MODIFICATION
On January 1, 2020, an entity showed the following: STEP 1 : COMPUTE THE PRESENT VALUE OF NEW NOTE
PAYABLE (using the old rate of 10%)
PV of principal (5,000,000 x .7513) 3.756.500
Note Payable – due Jan. 1, 2020 – 10% 5,000,000
PV of interest payments (5M x 14% x 2.4869) 1,740,830
Accrued Interest Payable 1,000,000 Present Value of New Note Payable 5,497,330

a. The accrued interest of P1,000,000 is forgiven. STEP 2 : COMPUTE FOR THE PREMIUM ON NOTE PAYABLE
Present Value of New Note Payable 5,497,330
b. The new interest rate is 14% payable every December 31.
Carrying Amount of Old Liability 6,000,000
c. The new date of maturity is December 31, 2022.
Premium on the New Note Payable 502,670

The present value of 1 at 10% for 3 periods is 0.7513 and the STEP 3 : COMPUTE FOR THE GAIN / LOSS ON
present value of ordinary annuity of 1 at 10% for 3 periods is EXTINGUISHMENT OF DEBT
2.4869.
Carrying Amount of Old Liability (Face Value of
5M + Accrued Interest of 1M) 6,000,000

Present Value of New Note Payable 5,497,330

Gain on Extinguishment of Debt 502,670
 Illustration2: MODIFICATION OF TERMS
NO SUBSTANTIAL MODIFICATION
Journal Entry to record the modified liability on January 1, 2020: STEP 1 : COMPUTE THE PRESENT VALUE OF NEW NOTE
Accrued Interest Payable 1,000,000 PAYABLE (using the old rate of 10%)

Premium on Note Payable 497,330

PV of principal (5,000,000 x .7513) 3.756.500

Gain on modification of terms 502,670

PV of interest payments (5M x 14% x 2.4869) 1,740,830
Present Value of New Note Payable 5,497,330
Journal Entry to record the annual interest payment for 2020:
Interest Expense (5,000,000 x 14%) 700,000 STEP 2 : COMPUTE FOR THE PREMIUM ON NOTE PAYABLE
Cash 700,000 Present Value of New Note Payable 5,497,330
Journal Entry to Amortize the Premium on Note Payable :
Carrying Amount of Old Liability 6,000,000
Premium on Note Payable 150,267 Premium on the New Note Payable 502,670
Interest Expense 150,267
STEP 3 : COMPUTE FOR THE GAIN / LOSS ON
Ta b le o f Amo rtiza tio n
EXTINGUISHMENT OF DEBT
Disc o unt C a rrying
Da te Inte re st Pa id Inte re st Exp e nse Amo rtiza tio n Amo u nt Carrying Amount of Old Liability (Face Value of
5M + Accrued Interest of 1M) 6,000,000
Ja n. 1, 2020 5,497,330
De c . 31, 2020 700,000 549,733 150,267 5,347,063
Present Value of New Note Payable 5,497,330
De c . 31, 2021 700,000 534,706 165,294 5,181,769
De c . 31, 2022 700,000 518,231 181,769 5,000,000 Gain on Extinguishment of Debt 502,670
TOTALS 2,100,000 1,602,670 497,330
SAMPLE EXERCISES
Please get your calculator, ballpen and paper
EXERCISE NO. 1

Rainbow Company showed the following balances on December 31, 2020:

Note payable – due December 31, 2020 1,000,000

Accrued interest payable 200,000

The entity is in financial distress and negotiates with the creditor for the settlement of the note payable.

Consequently, the entity transferred a patent to the creditor in full satisfaction of the note payable.

The patent has a carrying amount of P600,000 and a fair value of P1,100,000.

Required: Prepare journal entry to record the asset swap on the books of Rainbow Company under IFRS .
EXERCISE NO. 3

On January 1, 2020, Sunrise Company is experiencing extreme financial pressure and is in default in meeting
interest payment on a long term note of P6,000,000 due on December 31, 2021.

The interest rate is 12% payable every December 31. The accrued interest payable on January 1, 2020 is P720,000.
In an agreement with the creditor, the entity obtained the following changes in terms of the note:

a. The accrued interest on January 1, 2020 is forgiven.

B. The principal is reduced by P500,000.
c. The new interest rate is 8% payable every December 31
d. The new date of maturity is December 31, 2023.

The present value of 1 at 12% for four periods is 0.6355 and the present value of an ordinary annuity of 1 at 12%
for four periods is 3.0373.

Required: Prepare all indicated entries for 2020.

EXERCISE NO. 4

Due to adverse economic circumstances and poor management, Bontoc Company has negotiated a restructuring of
P8,500,000 note payable to Second Bank.

The bank has agreed to reduce the face amount of the note from P8,500,000 to P8,000,000, reduce the interest rate
from 14% to 10%, and extend the due date one year from date of restructuring.

The restructuring was done at the beginning of the current year. There is no unpaid interest on the restructured note
at this time.

The present value of 1 at 14% for one period is 0.8772 and the present value of an ordinary of 1 for two periods at
14% is 1.6467)

Required: Prepare journal entries for the current year.

 ASSIGNMENT:
PLEASE REFER TO LMS FOR YOUR
ASSIGNMENT
THANK YOU!