it +r27 -Financial Liabilities and Debt Restructuring
Chapter 27 -Financial Liabilities and Debt Restructuring
ORCLASSIFICATION OF FINANCIAL LIABILITIES
CHAPTER 27
FINANCIAL LIABILITIES AND DEBT
RESTRUCTURING
Financial Liabilities at
FVTPL (FLEFVTPL)
LEARNING OBJECTIVES:
After studying this chapter, you should be able to:
1. Identify and describe the different types of financial liabilities.
2. Describe credit risk.
3. Describe the initial recognition, initial measurement, subsequent
measurement, reclassification, derecognition and financial statement
presentation of financial liabilities.
bk 4
o
Describe and apply debt restructuring.
FINANCIAL LIABILITIES AT FAIR VALUE THROUGH PROFIT OR LOSS
In entity may,
at
initial recognition,
irrevocably
designate
libilityas measured at FVTPL when doing so
2) Eliminates or significantly reduces a measurement
a financial
or recognition
inconsistency (sometimes referred to as ‘an accounting mismatch’) that
would otherwise arise from measuring assets or liabilities or
recognizing the gains and losses on them on different bases, or
b) Agroup of financial liabilities or financial assets and financial liabilities
is managed and its performance is evaluated on a fair value basis, in
accordance with a documented risk management or investment
strategy, and information about the group is provided internally on that
basis to the entity’s key management personnel.
Differentiate accounting for financial liabilities under full PFRS ard
PFRS for SMEs.
Differentiate the accounting for FL@FVTPL and FL@FAAC.
LF\WTIA]. MEASUREMENT: FL@FVTPL
accounts.
Tliinsa'm-“‘,, cost or bond issuance cost directly attributed to the issuance of
Calculate the correct amount of financial liabilities and its it
ancialliabilities at FVTPL shall be initially measured at fair value.
m;\inal liabilities at fair value through profit or loss is treated as an
FINANCIAL LIABILITIES
Bt expense during the period incurred.
-
As discussed in the previous chapter, a financial liability is any Tiabilly
that s:
a. acontractual obligation:
i. to deliver cash or another financial asset to another entity: ¥ other
ii. to exchange financial assets or financial liabilities with an
¢
o
entity under conditions that are potentially unfavorable
entity; or
b.
| Uabilities at
Amortized Cost (FLRAC)
'
TOPIC OVERVIEW:
This chapter discusses financial liabilities, its characteristics, classificatizy
initial recognition, initial measurement, subsequent measurement, zn
reclassification, derecognition and financial statement presentation. It 2y
tackles the process and application of debt restructuring.
Finandial Liabilities
a contract that will or may be settled in the entity’s ©
instruments and is;
0
wn eai?
Unsequp,
Sbsequens " MEASUREMENT: FL@FVTPL
Accgy
t o initial measurement, FL@FVTPL is measured at fair value.
1 H""“"E for Changes in Fair Value
¥ld for tragip,
unrealized gain or loss in
P::l?ges n fair value are recognized as either
‘che;,’t;gflzesnareInd fair va
lye are recognized as either unreal
ized gain or loss to
i, a non-derivative for which the entity is or may be obliged jged 10 geli®f
k; c;sented
as
il a derivative that will or may be settled other than by the €070
b priCeghg18n¢ eiginnee fafairunir revavaallyluee atnoert attributable to change :in
ot Would creaizteed orgibaeniutnlaoabrlelostosinchtanhegePALin: the cre h in prol fit or
rg
counting Mis o
OS5, present all unrealiz e an gaac
ed ins or 10sses mofatch B A Lo
"
avariable number of the entity’s own equity instrumentsi ° angedd
a fixed amount of cash or another financial asset for 3/1*®
et
of the entity’s own equity instruments.
Other liabilities that did not meet the above requirements are mm-fi"”'a’I
follows:
the credit risk-
liabilities.
1097
1098
(%] CamScanner
Chapter 27 ~Financial Liabilities and Debt Restructuring
(including the effects of changes
liability) in P&L
oupter 27
in the credit risk of thy
if it would not create or enlarge an accounting mismatch
profit or loss, present the unrealized gain or loss attributable y,
changes in the credit risk of that liability in the OCL
iii. Remaining amount of change in the fair value, present g,
unrealized gain or loss in the P&L.
ii.
Credit Risk
TION: FL@FVTPL - No Changes Due to Credit Risk
ion’s Foremost CPA Review
uary 1, 2021, Nation’s
m‘:fi“
value of 2,000,000 for P1,935,152. lew |, Inc. issued 4-year bonds
The bonds carry an interest
of67% per year payable annually on December 31. On the date of issuance,
e company incurred and paid commissions to underwriters 0fP10,000.
The bonds are to be appropriately classified as financial liability at FVTPL.
31, 2021, the bonds are quoted at 103%,
faDecember
sssume that there are no changes due to credit risk.
PFRS 7 defines credit risk as ‘the risk that one party to a financ
instrument will cause a financial loss for the other party by failingto
discharge an obligation'.
Determining the effects of changes in credit risk
An entity shall determine the amount of change in the fair value of the
financial liability that is attributable to changes in the credit risk of that
liability either:
a) As the amount of change in its fair value that is not attributableto
changes in market conditions that give rise to market risk; or
b) Using an alternative method
the entity believes more faithfuli
represents the amount of change in the liability’s fair value that &
attributable to changes in its credit risk.
If the only significant and relevant changes in market conditions for 2
-Financial Liabilities and Debt Restructuring
1) How much is the interest expense for 20217
7) How much is the unrealized loss (or gain) in 2021 to be recognized in
the profit or loss?
3) Prepare necessary journal entries for the year 2021.
SOLUTION:
Requirement No. 1
Fatevalue
liability are changes in an observed (benchmark) interest rate, the amo:
Eequirement No, 2
ollows:
VarealCarrying valye
forucl-unge in the fair value of the financial liability can be estimated
a) First, the entity computes the liability’s internal rate of return -_';',:
start of the period using the fair value of the liability and the liabl
contractual cash flows at the start of the period. It deducts from this.
of return the observed (benchmark) interest rate at the start ©
period to arrive at an instrument-specific component of the int*
rate of return.
jated
b) Nex, the entity calculates the present value of the cash flows 3525
with the liability using the liability’s contractual cash flows at the €
the period and a discount rate equal to the sum
)
The difference between the fair value of the
liability at the - lue
period and the amount determined in (b) is the change in f2i"V2
is not attributable to changes in the observed (benchmark) inte*
‘This is the amount to be presented in other comprehensive inco!
This method would not be appropriate if changes in fair value arisiné
other factors are significant.
1099
2,060,000
1,935.152
1,935,152
“redlived loss - pg,
P 124,848
;:"l"'!mem No.3: Journal entries
wy
-
Uy
jodandA
the observed (benchmark) interest rate at the end of the P err;:“‘m
d of &
8%
12/12
P 160,000
hxr,ralue of the bonds
of:
L
fi._the instrument-specific component of the internal rate of
determined in (a).
%2,000000
Maltiply by: Nominal rate
"aliply
by: Months
Eresterpense outstanding
Financialabi
- FUTP
lyL
ommi
i ssision expense
Inte
eyrest expense
Unrealized Joss
Financial liability -
[
T
gy
0
FVTPL
e
18
'
1,945,152
e
160,000
12483
124,848
dit Risk
e
of 8%, which is consistent
b"h‘lqo 1 an annya fixed lcoupon rate
.
b
wi
©r bonds with similar characteristics.
of
interest rate. At the date of inception
(benchmark)
hhw‘-usths'%se“’m
'STateis 50, At the end of the first year:
1100
(%] CamScanner
Chapter 27 -Financial Liabilities and Debt Restructuring
a. Observed (benchmark) interest rate has decreased to
b. The fair value interest rate of the bonds is
craptel 27
Required:
1) Compute the unrealized gain or loss to be recognized in the 0C| during
2021
3)
Compute the unrealized gain or loss to be recognized in the P&L during
2021
Prepare the journal entry at the end of the period.
SOLUTION:
Requirement No. 1
Market price of the liability, end of the period (at 7.60%)
Less: FV of liability using the sum observed interest rate
and instrument specific IRR (at 7.75%)
Unrealized loss - OCI
P1,538,052
1,523,668
P14,364
e
e
o.2
i
150000000000
gamount of FVTPL
ein FLOFVTPL
_
I
m:Uana]ized loss in the OC
L
P&
s
d
Jarealize los
l entry:
Requirement No. 3 Journa
lazes
R
P14,36884
23,6
Unrealized loss - OCI
Uprealized loss - P&L
$38,052
Financial liability at FVTPL
DERECOGNITION: FL@FVTPL
Afinancial liability should be removed from the SFP when, and only when, it
is extinguished, that is, when the obligation specified in the contract is
either discharged, cancelled, or expired.
Derecognition gain or loss on held for financial liabilities at FVTPL is
Increase in the market price of the liability will result to an unrealized loss
wmputed as the difference between the consideration paid and the carrying
amount (fair value at the previous reporting date). But for financial
lbities designated as at FVTPL, the amounts presented in OCI shall not be
while decrease
sibsequently transferred to profit or loss. However, the entity may transfer
Note:
¥
)
RabreeTentNthe lsbilty, end of the period
4.75%
7.60%
Bacolod is required to present the effects of changes in the liability's credit
risk in the OCIL.
2)
_Financial Liabilities and Debt Restructuring
in the market
price of the liability will result to @
unrealized gain.
Internal rate of return at the start of the period-yield or
effective rate
Less: Observed (benchmark) interest rate, date of inception
Instrument specific-IRR
Yecumulative gain or loss within equity.
800%
"
__iw
3o
475%
Observed (benchmark] interest rate, end of period
00%
Add: Instrument specific - IRR
M %
Discount rate
_JE
remaininé
the
for
7.60%
using
period
the
of
end
liability,
the
of
price
Market
9 periods
0
Present value of principal (P1,500,000 x 0.5172)
® ;ngz
Market price of the liability, end of the period
A==cific
Add: PV of interest (P1.5M x 8% x 6.3521)
S
1 535'052
FV of liability using the sum observed interest rate and instrument $P°
IRR using 7.75%
Present value' of principal (1,500,0
200, 00 x . 0.5108)
Add: PV of interest (PL
x 8%5M
x 6.3124)
FV of liability using the sum observed interest
rate and instrument specific IRR
1101
766200
) 7,‘5
st
s
g:‘]ugr“"TION: Derecognition of Held for Trading Debt Securities
bonds with a face value
m;““ary 1, 2021, Occidental Co. acquired a 4-year
of 8% per year
carry an interest
Piyal;uno'ooo for $1,935,152. The bonds
e cvery December 31,
appropriately classified as held for trading. On
are 1,to thebe bond
ELET,"“31,202
s are quoted at 103%.
Ja
"31Y3,2022,
3R Wired;
Com
the bonds were retired at 104%.
ized ini
sale in 2022 to be recognized
i
req); zed loss (or gain)
'Pute the oo
) g‘emfi(ur
on
e
PEre the journal entry on the date of salei
xbu’me
Requipgy
Regip, { “MeNt Ng, .1
g (M price (P2M x 1041
55 Sale
g 8 < PRL
Valu
i
$2,080,000
2,060,000
_P"zo—olm’——
1102
(%] CamScanner
27 _Financial Liabilities and Debt Restructuring
Chapter 27 -Financial Liabilities and Debt Restructuring
Requirement No. 2 Journal entry
Financial liability at FVTPL
Loss on derecognition - P&L
Cash
AL LIABILITIES AT AMORTIZED COST (FL@AC)
zml'l“ of a financial liability measured at amortized cost include the
$2,060,000
20,000
#2,08001
ra"’:lmguntls payable
b Notes payable
¢ Loans payable
ILLUSTRATION: Realized Gain or Loss of FVTPL - with Change Due 1,
Credit Risk
On January 1, 2021, REO Co. issues a 10-year bond with a par value of
1,500,000 and an annual fixed coupon rate of 8%, which is consistent wis
market rates for bonds with similar characteristics.
The following discussion is therefore based on accounting treatment of
ese three financial liabilities.
BONDS PAYABLE
REO uses observed (benchmark) interest rate. The entity is required1
present the effects of changes in the liability’s credit risk in the other
—
Characteristics
comprehensive income. On December 31, 2021, when the fair value of te
[Description | A bond is a formal unconditional promise, made under seal,
financial liabilityis $1,538,052, REO appropriately recorded unrealized
loss | ||
to pay a specified sum of money at a determinable future
|
in the other comprehensive income of 14,364 and in the profit or ks
date, to make periodic interest payment at a stated rate
amounting to P23,688.
until the principal sum is paid.
On January 3, 2022, the bonds were retired at 104%.
Required:
v
1) Compute the realized loss (or gain) on sale in 2022 to be recognized
directly in the equity
2) Prepare the journal entry on the date of retirement.
SOLUTION:
Parties involved include the bond issuer (borrower),
bondholder (investor/lender), and underwriter/arranger
‘
| l
(one who serves as middleman fora fee from the borrower
or gain in reselling the instruments).
In addition,
financial assets.
/
Retirement price (P1.5M x 104%)
"'563':2?
Less: Carrying value
1 511'946
Loss on sale - OCI
‘P'“fllhdnn
Financial liability at FVTPL
Lossansale-0c1
£1,538,052
218
™
When the entity becomes a party to the contract or when
ansfer of resources
tran:
{ transfer
resources transpired:
___——————
in the statement of
Presented in the liability section
financial position and classified as to either current or nondate.
current depending on the expected settement
2=
Requirement No. 2 Journal entry
are financial instruments since they
represent contractual obligation to pay cash or other
|
Requirement No. 1
bonds
STy, M
o
PAYABLE
EASUREMENT: BONDS
at/air vl
FL@AC shal b inially measured
Ny 2ble classifed a5Normally,
proceeds
net
the
to
equal
is
it
cecr S0ction cost.
To record the retirement of FVTPL
Retained earnings
Unrealized loss - OCI
Loss on sale - OCI
To close the loss previously recognized in the OC to equity
Financial Statement Presentation of FL@FVTPL
36312y
n9
Financial liabilities through profit or loss should be presen!
current liability section of the SFP
1103
L
of issuance at interest date)
By “fthe bonds (in the case
of priority)
) :u': determined thry (in order
3
market.
R mta%n from an active
paymen!
interest
Nt value of all principal and
3
)
:r:)e o
directly annbute;idt:i “m; i:s;-r
L
:a;::h?“ or bond issuananceadjucost
stment to premium
ed as
B (ad:J; treat
t0) on bonds payable and not treated as 2
Costs In, curred on FL@AC
Taggelon
i
.
1104
(%] CamScanner
Chapter 27 -Financial Liabilities and Debt Restructuring
SUBSEQUENT MEASUREMENT: BONDS PAYABLE
Bonds payable are subsequently measured at amortized cost
usis
effective interest method of amortization.
cpete!
"0 the
Issuance of Bonds
Bonds may be issued thru the following scheme:
Characteristics
Scheme
Proceeds (P) vs
Effective (E) vs.
Face Amount (FA) | Nominal rate (N)
27 _Financial Liabilities and Debt Restructuring
mentNo. 1
I.'E:lrl:,e bonds were issued
as ollows:
o0
s
at face amount, it shall be recognized at
$1,000,000
Cndspayable
Maturity
value
P1,000,000
Note: Since the bonds were issued at face amount and on interest date, the
anying value of the bonds will be equal to its face amount at any given
pointin time. Also, the nominal rate is the same as effective rate.
At face amount
P=FA
E=N
FA
Requirement No. 2
Ata premium
P>FA
E<N
FA
Atadiscount
P<FA
E>N
FA
Theeffective rate of the bonds is lower than its stated rate. With this, bonds
sresaid to be issued at a premium. To determine the issuance price, let us
wompute for the present value using the effective rate of 8% for three
periods.
FINANCIAL STATEMENT PRESENTATION: BONDS PAYABLE
The net carrying value is to be reported on the face of the SFP as part of the
current or noncurrent section. Net carrying value is determined as follows:
Net carrying value
1) Bonds issued at face amount
Face amount
it
2)
Face amount
Less: Discount on bonds payable
X
5
Net carrying value
b4
Face amount
Add: Premium on bonds payable
Net carrying value
g
8
3)
Bonds issued at a discount
Bondsissued atapremium
00,000
On January 1, 2021, Zamboanga Co. issued 10%, three-year P10
Interests on these bonds are due annually every year-end.
Required: Provide the necessary journal entry/ies on the date of isst?
under the following independent situations:
1) Bonds were issued at face amount
2) Bonds were issued to yield 8%
3) Bonds were issued to yield 12%
Bonds were issued to yield 12% but were quoted at 98
1105
257,710
510
Thetransaction is then recorded as follows:
Cash
P1,051,510
Bonds payable (at face amount)
1,000,000
51510
Fremium on bonds payable
L‘;:': The bonds will be amortized using effective interest method using
.
e rate of the bonds s higher than ts stated rate. With
s are said to pe issued at a discount. To determine the issuance price,
knw‘:mpule for the present value using the effectivi e rate of 12% for for three
-
Pregg
K ":E\;alue of principal (1,000,000 x 0.7118)
M Value of interest (P1,000,000 x 10% x 2:4018)
Yo
P 711,800
240,180
P 951,980
Thetrgpe,
iscouy "S3ction is then recorded
D&ih
as follows:
B""dst: "bonds payable (p1M - P951,980)
Mo,
SOLUTION:
793,800
Total present value
ko
ILLUSTRATION 1: Issuance of Bonds on Interest Dates
P
Add: Present value of interest (P1,000,000 x 10% x 2.5771)
Yequirement N, 3
‘TERM BONDS
4)
Fresentvalue of principal (P1,000,000 x 0.7938)
951,980
-
,020
£1,000,000
| Y2ble (at face amount)
ing 12%.
The bongs will be amortized using effective interest method using
1106
(%] CamScanner
pter27 _Financial Liabilities and Debt Restructuring
Chapter 27 -Financial Liabilities and Debt Restructuring
Requirement No. 4
Since the bonds were quoted. The quoted price shall be used in detemm‘
the issuance price of the bonds.
Issuance price (P1,000,000 x 98%)
P 980000
The transaction is then recorded as follows:
Cash
Discount on bonds payable
Bonds payable (at face amount)
ILLUSTRATION 2: Issuance of Bonds at a Premium on Interest Date
Sibugay Corporation is authorized to issue P1,000,000 of five-year bonds
dated June 30, 2021 with a stated interest rate of 10%. Interest on the
bonds is payable semi-annually on June 30 and December 31. The compary
uses the effective interest method. The bonds were sold to yield 8%.
Required: (Round off present value factors to four decimal places)
1) Determine the following:
a. Bond issue price
b. Interest expense for 2021 and 2022
¢
31/2023
50000
312024
50000
2430/102‘
06[30/2025
12[31/2025
06/30/2026
42,099
7,901
1,044,562
8,546
1,027,798
8,888
9.244
9,666
1,018910
1,009,667
1,000,000
50,000
41,782
8218
50,000
50,000
50,000
41,112
40,756
40,387
41,454
1,036,345
Reguirement No. 1b
__P43246
Interest expense, 12/31/2021
P 42,976
42,695
P 85671
Iterest expense from 01/01/2022 to 06/30/2022
Interest expense from 07/01/2022 to 12/31/2022
Total Interest expense, 12/31/2022
Requirement No. 1c
Camying amount, 12/31/2021
P 1,074,391
Gyingamount, 12/31/2022
1,060,061
Requirement No. 2
Thejournal entries in 2021 are as follows:
1 Torecord the issuance of the bonds on June 30, 2021
Cash
Carrying value of the bonds on December 31, 2021 and 2022
1,081,145
Bonds payable (@ face amount)
Prepare the necessary journal entries
”'oggr‘;’gg
Premium on bonds payable
g
SOLUTION:
Requirement No. 1a
-~
Since the interest is payable semi-annually, the present value factor sl!
¥ Torecord inter rest
years x 2). The present value of 1 using 4% for 10 periods is 6756 Whi
g 'r:f:'d Pr;mium amortizatiori on December 31, 2;)62;54
be determined using semi-monthly interest at 10 semi-annual period (lf
present value of ordinary annuity using 4% for 10 periods is 8.1109.
Present value of principal (1,000,000 x 0.6756)
Present value of interest (P1,000,000 x 5% x 8.1109)
Total issue price - June 30, 2021
4 672’%
—%
06/30/2021
12/31/2021
06/30/2022
12/31/2022
06/30/2023
ot
Interest | Interest
Premium
Payment | Expense | Amortization
F";:::,
50,000
50000
50,000
50000
R
e
ey
105
43246
42.976
42,695
42.402
1107
6,754
7,024
7,305
7,598
s
e
et Expengo
payment
on December 31, 2021
\ Cash (P1,000,000 x 1296 x 6/12)
bonds payable
InterestM onexpense
£50,000
#50,000
d
P6,754
Finapg;
Stat, 3'1“5 ;‘;Imtm Presentation (2021)
ability section)
nancial Position (Non-current lial
P L0
Amortization table
Date
*
+ prior to principal payment
P980,000
20,000
£1,000,000
Note: In amortizing these bonds, a new effective rate shall be computed thry
interpolation.
2)
=
Nt of o,
?1,074391
L
" bayable
N
'Mprehensive Income
o IngErest expenge
p_ 43246
Sto
:M’:I:y:flrl Statements
£1,000,000
Net Scapp UM
on bonds payable
g amoyne
o
=oAL
P 1,074,
d: Prggri -
74,391
1108
(%] CamScanner
Chapter 27 -Financial Liabilities and Debt Restructuring
2L
ILLUSTRATION 3: Issuance of Bonds at a Discount on Interest
Date
Sibugay Corporation is authorized to issue $1,000,000 of five-year |,
dated June 30, 2021 with a stated interest rate of 10%,
Interest n:’,‘:l
bonds is payable semi-annually on june 30 and December 31, . The
.
uses the effective interest method. The bonds were sold to yield
12;{: Yy
Required: (Round off present value factors to four decimal Pplaces)
1) Determine the following:
a. Bond issue price
b. Interest expense for 2021 and 2022
¢ Carrying value of the bonds on December 31, 2021 and 2022
2) Prepare the necessary journal entries
ment No. 1¢
é""‘"‘;;; amount, 12/31/2021
P 931989
ayingamount, 12/31/2022
P 944,183
ent No. 2
,T:E‘il;:::‘:l entries in 2021 are as follows:
1. Torecord the issuance of the bonds on June 30, 2021
. Cash
P926,405
73595
Discount on bonds payable
Bonds payable (@ face amount)
Interest expense
Since the interest is payable semi-annually, the present value factor shoud
be determined using semi-monthly interest at 10 semi-annual period (ie,5
years x 2). The present value of 1 using 6% for 10 periods is .5584 while the
present value of ordinary annuity using 6% for 10 periods is 7.3601.
Present value of principal (P1,000,000 x 0.5584)
Present value of interest (P1,000,000 x 5% x 7.3601)
Interest expense
.
P5,584
financial Statement Presentation (2021)
Satement of Financial Position (Non-current liability section)
Bonds Payable
926,405
P931989
Satement of Comprehensive Income
Interest expense
Interest
Interest
Payment Expense
50,000
55584
50,000
55919,
50000
56,275
50,000
56,651
Discount
Present
Amortization
5,584
5919
6275
6,651
Vale
926405
931,989
937,909
944,183
950834
7,473
965357
50,000
57,050
12/31/2024
06/30/2025
50000
50,000
57,921
58397
12/31/2025
50,000
58,901
8,901
06/30/2026
50000
59435
9,424
06/30/2024
P5,584
Discounton bonds payable
Amortization table
12/31/2023
P50,000
1. Torecord premium amortization on December 31, 2021
P 558400
368,005
Total issue price - June 30, 2021
06/30/2021
12/31/2021
06/30/2022
12/31/2022
06/30/2023
$50,000
Cash (P1,000,000 x 12% x 6/12)
Requirement No. 1a
|
$1,000,000
1 Torecord interest payment on December 31, 2021
SOLUTION:
Date
-Financial Liabilities and Debt Restructuring
50,000
57,473
7,050
Notesto Financial
Bonds payabie
973,27‘;
S8LE1S
990.520
1,0000
Prior to principal payment
©
Iy
ssses
£1,000,000
ss: Discount on bonds payable
—M;_
®tcarrying amount
o
g Mt nOtes to Efective Interest Method
emg gp Ing the effective interest method, the behavior of the following
957,884
7,921
8,397
Lt
S tatements
ould be noted:
Interest
Carrying
%
ISCount
Value
R
Declini
il
Amortization
Expense
Declining
Increasin
;
Increasing
Increasing
gy BONDS
Requirement No. 1b
584
Interest expense, 12/31/2021
Interest expense from 01/01/2022 to 06/30/2022
Interest expense from 07/01/2022-12/31/2022
Total Interest expense, 12/31/2022
1109
_p ss3
3
52'3;59
_p
Uz
-
By n RATION; *Issuance on Interest Date of -Serial
Sel Bonds
with face value of P60D000 on J3ncery
{202, L)TPOTation3y issued bonds
ber 31. The
on December
hfi"d‘ irehi::,ummal rate of 6% is payable annually
e
effective yield. The bonds matur on every
by 31 d with an 89
€2ch year at the rate of 2,000,000 for three years:
1110
(%] CamScanner
chopter 27 _inancial
Chapter 27 —Financial Liabilities and Debt Restructuring
Torecord the issuance of the bonds on January 1, 2021
5,788,532
.
sh
e
211468
gdlscaum on bonds payabl
)
Bonds. payable (@ face amount
3 Torecord interest payment on December 31, 2021
Required: (Round off present value factors to four decimal places)
1)
2)
Determine the following:
a. Issue price of the serial bonds
b. Interest expense in 2021
¢ Carrying value of the serial bonds payable on December 31, 2031
Prepare the necessary journal entries
Interest Expense
Cash (P1,000,000 x 12% x 6/12)
SOLUTION:
Requirement No. 1
Present value of principal payments
P
333324
205,752
95,256
RS7885%
Reduction to
principal
Present
Value
Interest
__ Expense
12/31/2021
2,360,000
463,083
1,896,917
3,891,615
12/31/2022
12/31/2023
2,240,000
2,120,000
311,329
157,035
1,928,671
1,962,944
1,962,944
i
5,788,532
Note: Total payment consists of principal and interest payment.
£103,083
Discount on bonds payable
P103,083
Financial Statement Presentation (2021)
Satement of Financial Position
(urrent liability section
*Bonds Payable - current portion
£1,928,671
Non-current liability section
Bonds Payable - non-current portion
1,962,944
Satement of Comprehensive Income
Interest Expense
Notes to Finan
cial State
BndsPagaple
S5 Disc_ount
Requirement No. 1b
P_463,083
P 4,000,000
on Bonds Payable
‘—m‘m?
. “tcarying amount
Interest expense, 2021 (see amortization table above)
“Aicton of principal n 2022, See amortization table above.
Requirement No. 1¢
Carrying amount, 12/31/2021 (see amortization table above)
L&wfi
Note: Alternatively, the present value of serial bonds may be compute
follows (any difference is due to rounding-off):
12/31/2022
12/31/2023
$2,000,000
Interest Expense
T
01/01/2021
92,000,000
Cash
63433
Total
Payment
12/31/2021
360,000
4, Torecord discount amortization on December 31,2021
Amortization table
Date
Sonds payable
P 5,154200
Total
Date
P360,000
P6,000,000
3. Torecord principal payment on December 31, 2021
(P2,000,000 x 2.5771)
Present value of interest payments
2021 (6,000,000 x 6% x 0.9259)
2022 (P4,000,000 x 6% x 0.8573)
2023 (2,000,000 x 6% x 0.7938)
Liabilities and Debt Restructuring
ds
E3RL615
LI
0 Ma:::TloN: Issuance of Bonds Between Interest Dnusaon l'xludx,,g
i,
Uy
1, 2021, Samar Co. issued 12%, five-year PL
12021,
|acc"“«=.d interest. These bonds were dated Januany % & i0:
In
"Merests on these bonds are due annually every Decem
4
Total Payment
PVofl
9259
Uireq,
uy, ed: Compyte for the initial carrying amount of the bonds on March 1,
2,000,000 +240,000
2,000,000 +120,000
8573
7938
S0
2,000,000 +360,000
Moy,
onds g ¢
eig g
Requirement No. 2
The journal entries in 2021 are as follows:
1111
m the
total proceeds fro
iSStied between interest dates: thed from Sissuance of bonds;
receiVe
umpus“l of two; (1) amount had accTUe
ancegor.e, "eCeived for interest which
m interest date
1112
(%] CamScanner
and Debt Restructuring
cnapter 27 _financial Liabilities
ment No. 1
ary 1, 2021
m,v:xm issued on Janu
l Payments
cipa
Prin
of
e
valu
sent
#
Chapter 27 ~Financial Liabilities and Debt Restructuring
The initial measurement of the bonds shall be equal
to portion of the toty]
proceeds applicable to the bonds or total proceeds, net of accrued interegy
(£1,000,000 x 0.4972)
In the given data, the bonds were issued at 98% of the face 4 mount ¢
P980,000 (P1,000,000 x 98%). This is allocated as follows:
Total proceeds
P9
Less: Accrued interest (P1,000,000 x 12% x 2/12)
EZHDMWU
Proceeds applicable to the bonds
uflm
Payments
present value of Interest
(1,000,000 x 12% x 3.3522)
N Bfl_gz z‘fig
Total
.
Requirement No.2
In computing for proceeds from issuance between interest dates, we can
simply compute for the carrying amount on issue date assuming the bonds
yere issued at interest date. In this example, let us compute for the carrying
amount on March 1, 2021 assuming that the bonds were issued on January
The transaction is then recorded as follows:
Cash
Discount on bonds payable
Bonds payable (at face amount)
Interest expense*
P980,000
40,000
£1,000,000
000
*The accrued interest may also be credited to interest payable account.
Torecord interest payment on December 31, 2021
If accrued interest is credited to interest expense
Interest expense
$120,000
Cash (P1,000,000 x 12%)
Ifaccrued interest is credited to interest payable
Interest expense
Interest payable
Cash (P1,000,000 x 12%)
2.
1,2021,
dlwe have to do is to amortize it as follows:
Date
Interest
Payment
Interest
_Expense
Discount
_Amortization
120,000
134,920
14920
P 899,464
914,384
12/31/2023
120,000
139,731
19,731
951272
P10
| QL“Z_&S
120,000
w0
March 1, 2021
120000
01/01/2021
|-12/31/2021
12/31/2022
£100,000
20,000
To record discount amortization on December 31, 2021
Interest expense
£120,000
Discount on bonds payable (P40,000/5 x 10/12)
nz
Note: To amortize these bonds, an effective interest rate shall be comP ")
through interpolation.
ILLUSTRATION: Issuance of Term Bonds Between Interest Dates
eyt
On January 1, 2021, Leyte Co. is planning to issue a
12% i o
P1,000,000 bonds. Interests on these bonds are due annually fl’;”
end. Leyte determines that the current market rate on January 11515
Required: Compute for the amount of proceeds received from uancte,
i
into
assuming bonds were issued on (Round off present value facto™ L
decimal places)
1) January 1,2021
2) March 1,2021
|
Since we have already computed for the issuance price on January 1, 2021,
Pro-forma entries for transaction related to the issuance in 2021 include:
1.
—
123172024
Based on the
120,000
120000
137,158
142,691
146,094
17,158
22691
26,036
Carrying
Value
931,541
973963
1,000,000
*
ove amortization table, we can say that the issue price on
is between the carrying value as of January 1, 2021 and
ember 31, 2021 amounting to P899,464 and P914,384, respectively.
g < US note that the difference between these two amounts represent
Wi mhm"m amortization for one year or twelve (12) months.
these,the
i sue price would be:
o
January 1, 2021 on
pEamount,
Aag to pount
amortizati
from January 1
Prncl: March 1(p14,920 x 2/12)
the bonds
Adg e o03PPlicable
Totg]
interestto (#1,000,000 x 12% x 2/12)
Mg, at Proceeds from issuance
P 899464
P
9011 9,5511
901,
20,000
P921,951.
computed as if
the Proceeds applicable to the bonds may be
By boy LW,
i
Months g4 on interest date (january 1, 2021) was amortized for two
Pto March 1, 2021,
SOLUTION:
1113
1114
(%] CamScanner
Chapter 27 -Financial Liabilities and Debt Restructuring
Date
chap! ter 27. _Financial Liabilities
Interest
Interest
Discount
Payment
_Expense
_Amortization
01/01/2021
03/01/2021
20,000
22,487
Cary
vm:‘
1
P899,464
901951
2,487
and Debt Restructuring
;[RA'"UN’ Retirement nf_ Bonds
:- oban Corporation is authorized to issue P1,000,000 of five-year bonds
d:: o June 30, 2020 with a stated interest rate of 10%.
Interest on the
yonds s payable semi-annually on June 30 and December 31. The company
westhe effective interest method. The bonds were sold to yield 8%.
DERECOGNITION: BONDS PAYABLE
A financial liability should be removed from the SFP when, and only when,
is extinguished, that is, when the obligation specified in the contract is
either discharged, cancelled, or expired.
bonds were
Reguired: Determine the amount of gain or lossns:assuming the
situatio
ndent
reired under the following indepe
1) OnJanuary 1, 2021 at face amount
7) OnApril 1, 2023 at 105
3) Onjune 30, 2025
Retirement of Nonconvertible Bonds Payable
(Note: If the problem is silent, assume that the bonds are nonconvertible)
SOLUTION:
The data in this illustration are similar with that of lllustration 2 Issuance of
tonds at @ premium on interest date. With this, we can simply copy the
amortization table to be able to address the requirements of this problem.
Summary of accounting treatments
Retirement price
Retirement of
bonds prior to
date of maturity
applicable to principal
Difference is recognizedas | | |pate
axlingulshmenkofbun«i’;‘
16/30/2020
Canping st
(part nlpmli;lv;;;nxs for!
12/31/2020
gain or loss on
ol
i
bonds on the date of
maturity
v
Neirementar
ettlement price an
bondsammauariy of
“PRIIE
amaiiit
]
(o]
No
gain or loss is recogni
daedl
Step 2 Compute for the gain or loss on retirement using this formula:
Retirement price applicable to principal
Loss/(gain) on retirement
of bonds - P&L
Premium on bonds payable (if applicable)
®
1115
e
Lotao0
7,598
/30/2023
50,000
41,782
8218
42,099
¥
1,052,464
1,036,
,027,798
flsfiaajiggi
50000 . At
2y
:;g; 2
9244
1,009,667
U/30/2025
50,000
40,387
9,666
P1,000000
B |
Ging 1ying amount (see amortization table)
W&
XX
Gain on retirement of bonds (if applicable)
lggzgig
42,402
s0000
1,067,366
Lgmentprice
»1,00000
L
0
[_1_!]1‘1.3.91-1!
74.391)
"\ Tetirement
of bonds - P&L
lll?r l:’“Enan, 2
Bundf payable (@ face amount)
Discount on bonds payable (if applicable)
7901
50,000
;&q‘;ullement No.1
Note: No gain or loss on retirement of bonds on maturity
Cash (retirement price)
1,060,061
"
8|
Less: Carrying amount of bonds payable
Loss on retirementn of bonds (if applicable)
7,305
7,024
*_Priorto pringi
Tebrincipalpaymen
Tetiramsnt
Step3 Record the transaction as follows:
42,695
U6/30/2022
3112008
Update the amortization of the bonds payable as of the
1,074,391
42,976
gz
1,061,145
6,754
50,000
50,000
carrying
Value
43246
06/30/2021
123
Nossiner
Procedural approach in retiring regular bonds
Step1
50,000
12/31/2021
.
carrying amount will
Interest | Interest | Premium
Payment | Expense | Amortization
1,050,000
Price (P1,000,000 x 105%)
P00
Ying amount (see amortization table)
oy
oo
Less, "8 amount, 12/31/2022
[g ?
Amortizay
ation up to 04/01
logg Son 2 18x
R u4sEe
3/ )
(109
“litement of bonds - PaL
(1.040453)
[3
9,547
1116
(%] CamScanner
Chapter 27 -Financial Liabilities and Debt Restructuring
apter 27 _Financial Liabilities and Debt Restructuring
Requirement No. 3
Zero. On June 30, 2025 maturity date, the retirement price and the carpy;
1. To record the issuance of the bonds
" cash
.
.
amount is equal to the face amount of the bonds. Thus, no gain or Jogs shn‘
Bonds payable (@ face amount)
il
b.
Debt instruments issued with detachable share purchase warrants
Share premium - warrants outstanding
Share capital (@ par value)
Share premium
Accounting Treatment
Split accounting
According to PAS 32, the component parts of compound financa
instruments must be accounted for and presented separately according
to their substance based on the definitions of liability and equity.
3, When warrants expire or not exercised
Share premium - warrants outstanding
Share premium
annually on December 31. The bonds mature on December 31, 2025. When
lhfbonds are issued, the prevailing market rate of interest for similar bonds
without warrants is 12% per annum.
Required: Based on the preceding information, determine the following:
-
The split is made at issuance and not revised for subsequent C"“"g”fl'l:
WRound off present value factors to four decimal places)
Il\moumallocated to warrants
that changes
nierest expense in 2021
fia"yiflg value of the serial bonds payable at December 31,2021
eteffect to equity assuming 60% of warrants were exercised.
BONDS PAYABLE WITH DETACHABLE WARRANTS
Bonds may be issued with detachable warrants. These warran ts entitle 1
bondholder to acquire equity securities of the bond issuer t an L2"asitt
Net effect o equity assuming the other 40% of warrants expired.
SOuyrrgy,
subscription price. Because of this entitlement, it is presumed et T
Uiremen ng, 1
from the bonds issued, the entity has also issued an equity mstr“m“fi
Thus, the total proceeds should be allocated to both the bonds and W2
using the residual approach (i.e, A-L=E).
Appropriate allocation is performed as follows:
Total proceeds (Asset)
Less: Fair value of the bonds payable (Liabilities)
Value assigned to warrants (Equity)
1117
19¢eeds from issuance of bonds payable with warrants
Les 4000000
x 9355)
* Fair value of bonds without warrants
et
X
X
Furthermore, the following are the pro-forma entries to record ™ n:
involving warrants.
X
of common stock, par P50, at P55 per share. The nominal rate is payable
is otherwise known as “with-and-without method" and “residual approact”
market interest rates, share prices, or other event
likelihood that the conversion option will be exercised.
XX
ILLUSTRATION: Bonds Payable with Warrants
Ormoc Company issued bonds payable with warrants of 4,000, 10% 5-year
bonds, face value of P1,000 at 98 on January 1, 2021. Each bond is
acompanied by warrant that permits the bondholder to purchase 20 shares
Approach on how to split
According to par. 31 of PAS 32, “when the initial carrying amount of 8
compound financial instrument is required to be allocated to its equityand
liability components, the equity component is assigned the residul
amount after deducting from the fair value of the instrument a2
whole, the amount separately determined for the liability component.” Th'IS
When to split?
5]
Convertible bonds
-]
premium on bonds payable (if applicable)
Share warrants outstanding
2, Whenwarrants are exercised
Cash
COMPOUND FINANCIAL INSTRUMENTS
Compound financial instruments are financial instruments that have both
liability and an equity component from the issuer's perspective. Examples
include the following:
a.
xx
-]
be recognized.
xx
Discount on bonds payable (if applicable)
sacd‘""
Tesent valye of Principal Payments
E:.uoo,noo x0.5674)
|
|
4Sant Value of Interest Payments
A'flnu :000,000 x 10% x 3.6048)
"allocated to warrants
P 3,920,000
P 2,269,600
_3.711520
YT
1118
(%] CamScanner
ter 27 ~Financial Liabilities and Debt Restructuring
Chapter 27 -Financial Liabilities and Debt Restructuring
The amortization table for the bonds
Interest
Payment
Date
payable is as follows:
Interest
__Expense
Discount
Amortization
01/01/2021
12/31/2021
cvz:‘
400,000
445382
400,000
400,000
450,828
456,928
12/31/2024
400,000
463,759
400,000
471,410
45,382
3,756,902
50,828
56928
3,807,731
3,864,658
63,759
3928417
71,583
4,000,000 *
*__Prior
to principal payment
P_44538
Requirement No. 3
Carrying amount
Carrying amount, 12/31/2021
P.3.75690
Entries to record transactions in 2021
1. Torecord the issuance of the bonds on January 1, 2021
Cash
£3,920,000
Discount on bonds payable (4M - 3,711,520)
288,480
Bonds payable (@ face amount)
Share warrants outstanding
Torecord interest payment on December 31, 2021
Interest expense
P400,000
Cash (P4,000,000 x 10%)
3.
st
-
Share warrants outstanding’
Common stock (P4,000 X 60% x 20 x P50)
40,08800
$2,6125,0
4,000,000
208,480
1(P4,000x 60% x 20 shares x P55)
#(p208,480 x 60%)
Increase in share premium (general)
P
Netincrease in share premium
£_240,000
Interest expense
Discount on bonds payable
P45,382
CONVERTIBLE BONDS
Convertible bonds are bonds that give the holder an option to convert the
bonds into bond issuer’s equity securities. An entity recognizes separately
omponents of a financial instrument that:
creates a financial liability of the entity and
.
grants an option to the holder of the instrument to convert it into an
o
Torecord premium amortization on December 31, 2021
365,088
Requirement No. 5
When warrants issued expired, the net effect to equity would be ZERO. The
balance of share warrants outstanding will be reclassified as part of general
share premium.
Share warrants outstanding (P208,480 x 40%)
83,392
Share premium
83,392
.
P40,
$2,400,000
365,088
share premium (balancing figure)
Less: Decrease in share warrants outstanding
Requirement No. 2
Interest expense
Interest expense, 2021
2.
mulrtmfl“ No.4
P3,7115%)
12/31/2022
12/31/2023
12/31/2025
#priorto any exercise or expiration.
€quity instrument of the entity.
lus. the total proceeds should be allocated to both the bonds and
Version option using the residual approach (e,
pi5382
A= L=E).
rm'",'m"‘e' the following are the accounting treatment of possitle
oninvolving conversion option.
Financial Statement Presentation (2021)
Statement of Financial Position (Non-current liability s“fln“)rj.lfififl
Bonds payable
L
g€ of convertible bonds
MBibione
Propriate allocation is performed as follows:
Proceeds (Asset)
Tj-:au—» Value of the bonds payable (Liability)
*Share premium - warrants outstanding
Statement of Comprehensive Income
assigned to conversion option (Equity)
Interest expense
Notes to Financial Statements
Bonds payable
14,0000
Lzflmfl
Less: Discount on bonds payable
wsfifl‘
Net carrying amount
1119
xxxx
XX
Casy
Bo,
g
0N bonds payable (if applicable)
0]
"5 Payable (@ face amount)
xx
K,
1120
(%] CamScanner
Chapter 27 -Financial Liabilities and Debt Restructuring
Retirement of convertible bonds
Difference is recognized asy
Retirement price
Share premium - conversion privilege
Retained earnings (bal. figure)
Cash (retirement price)
Discount on bonds payable (if applicable)
Gain on retirement of bonds (if applicable)
change allocated to equity;
+ increase (share premiur)
« decrease (to be chargedo
share premium -
Retirement price
Retirement of
bonds prior to
applicable to liability
(ie. Present value of
date of maturity
thebondsusing ™
current rate)
conversion privilege and
any excess, if any, to
retained earnings)
|\
Difference is recognized as
gain or losson
extinguishment of bonds
(part of profit or loss for the
Carrying amount of
period)
bonds on the date of
maturity
pr—
Goaveritile b
ebonds
On maturity date
I
Settlement price and
carryingamount will
" hoequaltoface
amount
[*|
No gain or loss is recognized
and share premium conversion privilege may
transferred to general shart
premium (excess over P}
Procedural approach in retiring convertible bonds
i
Step1 Update the amortization of the bonds payable as of the date
retirement.
Step2 Compute for the gain or loss on retirement using this formula: Fair value of bonds payable
Less: Carrying amount of bonds payable
Loss/(Gain) on retirement of bonds
(xa)
e
Note: No gain or loss on retirement of bonds on maturity
Step 3 Compute for the increase or decrease in equity using this farmu)l{;-x
Fair value of bonds payable
o)
Less: Retirement price applicable to principal
Increase/(Decrease) allocated to equity
Alternatively, the change in equity may be computed as fc]lows(m)
Decrease in SP - Conversion Privilege
Decrease in Retained Earnings (if applicable)
Increase in Share Premium excess over par (if any)
Total Increase/(Decrease) allocated to equity
1121
(o)
Share premium excess over par (bal figure)
EEEK
step# Record the transaction as follows:
Bonds payable (@ face amount)
Loss on retirement of bonds (if applicable)
premium on bonds payable (if applicable)
BHREK
chapter. 27 -Financial Liabilities and Debt Restructuring
B
Premium on bonds payable (if applicable)
Share premium - conversion privilege
Conversion of Convertible Bonds
PAS 32 states that on conversion of a convertible instrument, the entity
derecognizes the liability component and recognizes it as equity. The
original equity component remains as equity (although it may be
transferred from one line item within equity to another). Furthermore, the
conversion shall not be accounted for as an “debt for equity swap” in
compliance with the requirements of IFRIC 19.
There are two types of conversion of bonds:
1 Regular conversion - no gain or loss on conversion shall be
2
recognized.
Induced conversion - loss on conversion may be recognized but not
Eain on conversion.
Summary of Accounting Treatment for Regular conversion
o If the sum of carying
Carrying amount (CA)
amount and ~conversion
of bonds on the date
privilege is greater than par
of maturity
Lomersion of
or stated value, the
difference is recognized as
14500 or prior
an increase in share
to date of
premium.
Maturity
Par or stated value of
If the sum of carrying
share capital issued
amount and conversion is
lower than par or stated,
difference Is discount on
share capital and will be
collected from the new
charshalder
Proge
Step , dyUral ap,
ion of bonds
Py,
g
Proach for the regular conversio
te
P4t the amortization of the bonds payable as of the date
of
e
1122
(%] CamScanner
Step 2 Record the transaction as follows:
Bonds payable (@ face amount)
Premium on bonds payable (if applicable)
Share premium - conversion privilege
Discount on share capital (bal. figure)
Cash (retirement price)
Discount on bonds payable (if applicable)
Share premium excess over par (bal figure)
face amount of debt securiti.es converted
price
pivide by: 0ld conversion
Number of shares issued under original conversion
Multiply by: Fair value of shares on the conversion date
=EE
Induced conversion
Recognition of Expense upon Conversion
The debtor enterprise shall recognize an expense equal to the fair value of
all securities and other consideration transferred in the transaction in
excess of the fair value of securities issuable
conversion terms.
pursuant to the original
The fair value of the securities or other consideration shall be measured as
of the date the inducement offer is accepted by the convertible debt holder.
Normally this will be the date the debt holder converts the convertible debt
Fairvalueoff shares under original conversion
[EEEEE
cnapter 27 -Financial Liabilities and Debt Restructuring
EEEZE
Chapter 27 -Financial Liabilities and Debt Restructuring
Aternatively, the loss may be computed as follows:
shares to be issued — amended (face value/new conversion price)
Less: Shares to be issued - original (face value/old conversion price)
Incremental shares to be issued
Multiply by: Market price of share capital at amendment date
Debt conversion expense or loss due to induced conversion
XX
XX
XX
XX
XX
Note:
The new conversion price should be lower than the old conversion price so
that the bondholder will be encouraged or induced to convert their bonds. This
will result to a loss due to induced conversion but not gain on induced
conversion.
into equity securities or enters into a binding agreement to do s0. [SFAS 84
In accordance with paragraph AG.35 of PAS 32, “an entity may amend the
terms ofa convertible instrument to induce early conversion, for example,
Conversion of Nonconvertible Bonds (Debt-for-Equity Swap)
(nnver_slon of nonconvertible bonds is within the scope of IFRIC 19.
‘onsideration in the event of conversion before a specified date.
ellablllrycxflngu(shed,
by offering a more favorable conversion ratio or paying other additional
:hrmrdmgly, the debtor should measure the equity instruments issued to
w;:mdl(or at fair value, unless fair value is not reliably determinable, in
: Ich case the equity instruments issued are measured at the fair value of
The difference, at the date the terms are amended, between the fair value
of the consideration the holder reccives on conversion of the instrument
under the revised terms and the fair value of the consideration the holdef
3:}1 debtor recognizes in P&L the difference
Formula
In cases where there would be amendments of terms to induce W"vefiI:II‘s'
additional loss should be recognized in the profit or loss for the period: T
shall be computed as follows:
I
nL,,L}::ATmN: Conversion of Convertible and Nonconvertible Bonds
would have received under the original terms is recognized as 2 Toss in
profit or loss.”
Fair value of shares converted
g
Less: Fair value of shares under original conversion
Debt conversion expense or loss on induced conversion
fi
-
Face amount of debt securities converted
Divide by: New conversion price
g
fi
Number of shares issued upon conversion
Multiply by: Fair value of shares on the conversion date
Fair value of shares converted
XX
j
een the carry amount
! e financial liability (or part) extinguished betw
and the measureming
ent of the
"instruments issued.
Depy, /nr~2qulty swap is discussed in more detail later in this chapter.
125
p.21Y 1, 2021, Bohol Company converted its 5,000, P1,000 face value,
i
"dS payable with a carrying amount of 5,248,634 for 100,000
eof
with a par
g shares
irement
value of P50, The fair value of the bonds on the
is ps, 400,000.
conversion.
Usp e d: Pre, Pare al| he necessary entries on the date
e honds
and the share
Rey qui
0: Assume that the bonds are converti
Py
I,
No, 2,
™ conversion option was P180,000.
tha the bonds are nonconvertible and the conversion
Z Assume
Aresy|e Ofdebt
for equity
swap.
L"'."‘)N:
0,1,
1123
LJourna) entries
1124
(%] CamScanner
Chapter 27 -Financial Liabllities and Debt Restructuring
Bonds payable
crapter 27
5,000,000
Share premium - conversion option
Premium on bonds payable (5,248,634 - 5M)
Ordinary shares (100,000 x 50)
Share premium
P5,00000)
428,634
£5,000,000
151,366
248,634
5,000,000
400,000
The gain or loss on settlement of liability is computed as follows:
$5,400,000
Fair value of liability
5,248,634
Less: Carrying amount of the bonds payable
151,366
P
liability
Loss on settlement of
The share premium is computed as follows:
Fair value of liability
Less: Total par value of the shares issued
Share premium
T
60'033
f shares issued upon conversion
w‘:fi;?,y Fair value of shares on the conversion date
180,000
248,634
Note that there is no gain or loss on regular conversion of convertible bonds,
CASE NO. 2: Journal entries
Bonds payable
Loss on settlement of liability
Premium on bonds payable (P5,248,634 -P5M)
Ordinary shares (P100,000 x 50)
Share premium
~Financial Liabilities and Debt Restructuring
5,400,000
5,000,000
_p_400000
Note that if the problem is silent, the bonds payable are assumed to be now
§m
Fair value of shares converted
Face amount of debt sgcufitigs converted
Divide by: 0ld conversion price
P1,200,000
25
"
Number of shares issued under original conversion
48,000
Multiply by: Fair value of shares on the conversion date
Fairvalue of shares under original conversion
28
P1,344,000
Fairvalue of shares converted
Less: Fair value of shares under original conversion
Debt conversion expense or loss on induced conversion
£1,680,000
1,344,000
P336000
Bonds payable (at face amount)
Debt conversion
expense
£1,200,000
or loss on induced
336,000
conversion
Discounton bonds payable (P1.2M - 1,158,332)
P 41668
Ordinary shares (60,000 x P10)
600,000
Share premium (balancing figure)
894332
Note:
¥ Cash is not debited equal to the conversion price because the market
conversion price merely indicates the ratio of shares to be issued upon
conversion of the bonds.
SUMMARY OF RETIREMENT AND CONVERSION OF BONDS PAYABLE
convertible.
ILLUSTRATION: Induced Conversion
ds due
Accounting Treatment
Retiy Scenario
recognized on retirement of
o.Fme"( of Bonds | Gain or loss may be
On January 1, 2020, Cebu Co. issued, 1,200,000, 8%, convertible bon smm
after 4 years. The bonds were sold for 1,123,910 and are convertible
P10 par ordinary shares ata conversion price of P25 per share.
honds]m"ve'fih'e
;
bonds into ordinary share, reduced the conversion price to P20 iP€f
value®
for bondholders that converted within 40 days. On this date, the e fal o i
Reg
“""l‘::rmfi;?l
On December 31, 2021, Cebu Co, in an effort to induce conversio? oLfl“
the bonds is P1500000 and the bonds have a carrying 27y,
£1,158,332. All the bond holders accepted the offer on December
0n the date of conversion, the fair value of the Cebu Co!s ordina®
P28 per share.
shm“
PiRg)"®
K
Prepare the necessary journal entries in 2021.
St
1125
000
p1200%
on maturity.
No gain or loss on retirement of bonds
amount = gain or
(Retirement price minus carrying
_
loss)
ement of
retir
on
nized
recog
be
may
of [ Gain or Toss
bonds | bonds prior to maturiy.
in equity shall also be
Net increase or decrease
)
computed.
Required:
SOLUTION:
Face amount of debt securities converted
Divide by: New conversion price
bonds prior to maturity.
Werg
Nvepe
k"mh v:"'hle
%Use
No gain or loss on retirement
of bonds on maturity
date,
|l]
le bonds
of convertb
o | No gain or Toss on canversonsion,
unless under induced conver be recognized (fair
conversion may D T
Va;l?eorolfus:q:?:y instrument (or _if not reliabr:y
of | Gai
value of liabiity)
able
_of | determinfair
Minis 22
1126
(%] CamScanner
crapter 27 -Financial Liabilities and Debt Restructuring
Chapter 27 -Financial Liabilitles and Debt Restructuring
equity
swap
(IFRIC | amount of liability = Loss (or Gain)
\|
fequirement No.2
pumfll entries are:
19)
BONDS PAYABLE TO BE REDEEMED CONTRACTUALLY AT A PREMyy
OR DISCOUNT
If the bonds payable are to be redeemed contractually at a premium o
discount, the liability will need to be accreted over time such at the
redemption date, the carrying amount of the liability is equal to the
redemption price. The accretion of the redemption premium attributable
to an accounting period will be presented together with the accrued
dividends as interest expense for that period in the profit or loss. On the
other hand, the accretion of the redemption discount shall be deducted fron
the interest expense for that period.
ILLUSTRATION: Issuance of Bonds with Redemption Price
Quezon Company issued 20,000 unsecured, P10, 12% bonds on January L
2021 at a discount of 4% to be redeemed on December 31, 2023 at2
a2t
1,
Cash (20,000
x P10 x (1-4%))
Bonds payable
P2,300
2,874
24,000
Dec.31,
w02
Interest expense
$29,960
Discount on bonds payable (5,960 x 44.44%)
Premiums on redemption of bonds (5,960 x 55.56%)
Cash
P2,649
3311
24,000
Dec.31,
03
Interest expense
P30,866
Discount on bonds payable (6,866 x 44.44%)
Premiums on redemption of bonds (6,866 x 55.56%)
Cash
P3,052
3,814
24,000
2;;31,
1) Compute for the present value (fair value) of the financial liabilty30
2)
SOLUTION:
Requirement No. 1
Present
value
of
¢
principal
including
premium
on
Add: Present value of interest (10 x 20,000 x 12% x 2.2759)
Present value
200,000
10,000
Cash
$210,000
The premium on redemption of bonds shall be treated as an addition to the
Zn; :;:zl Interest expense is equal to the total interest paid of P72,000 (10 x
th
il
Interest
Date
Payment
expense
12/31/2021
12/31/2022
12/31/2023
24,000
24,000
24,000
29,174
29,960
30,866
———W
Payment
Premium
(P10 x 20,000
x 5%)
(P10 x 20,000 x 4%)
Presentation (2021)
ofFinancial Position (Non-current liability section)
200,000
(5,700)
2,874
P 197,174
—_—r
Totg) ™ on redemption of bonds
InyMent o, Compreh,
Ratio
10000
10/18
18,000
18{18
8000
1127
Fing '::': ‘Shlelnen(
Payable
Disc/Prem
Total
X12%x3 years) plus total discount of P8,000 (P10 x 20,000 x 49%)
"l premium on redemption of P10,000 (P10 x 20,000 x 5%).
Dcount 0 bonds payable (P8,000 - $2,300)
The amortization shall be allocated pro-rata to the discount and pré
using these ratios:
Amount
i
"2:'211
=
Amortization table:
Interest
Discount
Bonds payable
Premium on redemption of bonds
, Sonds payable,
redemption date (P10 x 20,000 x (1+5%) X .6542]
01/01/2021
3
-
Prepare the journal entries on 2021, 2022 and 2023.
200,000
Interestexpense
P29,174
Discount on bonds payable (5,174 x 44.44%)
Premiums on redemption of bonds (5,174 x 55.56%)
Cash
of 15.1948%.
prepare the amortization table.
8,000
Dec.31,
01
premium of 5%. These debentures were issued at an effective interest rate
Required: (Carry all decimal places during the computation)
P192,000
Discounton bonds
8/18
‘g
-
miv™
leest ey
» 855
cenSIve Income (2021)
ki
B}
iCe SHARE
;:m:f:'w
e, (g °CS oy et
.
that g gives the holder certain
i
is an equity instrument
shall be classified
ordinary shareholders. This instrument
e l’inv:r
°Fequity or financial liability depending on the following:
1128
(%] CamScanner
Chapter 27 -Financial Liabilities and Debt Restructuring
a.
If the preference shares are nonredeemable or redeemable g the
option of the corporation (also known as callable preference share,
these shall be treated as part of shareholders’ equity.
b.
]
cnapter 27. -Financial Liabilities and Debt Restructuring
zation table:
Y
pate
Interest
Interest
Payment
Present
expense
Amortization _ value
P150,
If the preference shares are mandatorily or compulsorily redeemap,
or are redeemable at the option of the holder at a fixeg o
determinable date, these shall be treated as financial liability,
Accounting for preference shares as part of shareholders'
discussed in Chapter 32 Shareholder’s Equity.
REDEEMABLE
PREFERENCE
SHARES
TO
BE
ILLUSTRATION:
Redeemable Preference Shares
Aguinaldo Limited issued 15,000, P10 par, 10% redeemable preference
shares on January 1, 2021. The shares are subject to compulsoy
redemption by the company on December 31, 2023 at a premium of P20
per share. The effective interest rate on the date of issuance is 15.7203%.
On December 31, 2023, the directors resolved to redeem the preffl'fll‘f‘:
shares at a premium of P.20 per share. This was in accordance with
terms of the original issue.
.-
1) Compute for the present value (fair value) of the financial liability (
redeemable preference share) and prepare the amortization table.
Present
value
of principal
including
premium
redemption date [P10 x 15,000 x (1+.20) x .6453]
on
Add: Present value of interest (10 x 15,000 x 10% X 22649)
Present value
1129
the
p116357
3388
—coq0
==
26,490
jin1,
Cash (15,000
021
Preference shares
8,580
158, 50!300'J
168510
p180,000
9929
1149
P150,000
P10)
P150,000
Dec.31,
2001
Interest expense
Premium on redemption of pref. shares
Cash
P23,580
Dec.31,
Interest expense
P24,929
Premium on redemption of pref. shares
02
P8,580
15,000
P9,929
Cash
Dec.31,
15,000
Interest expense
Premium on redemption of pref. shares
w2
P26,490
P11,490
15,000
Cash
;l;;- 31,
Preference shares
Premium on redemption of pref. shares
Cash
2
150,000
30,000
P180,000
Notes:
v
:g; fremium on redemption of preference shares shall be treated as an
Thelr:);lw the preference shares.
interest expense is equal to the total interest paid of P45,000 (10 x
15,000
x
Ploy p.);;?_ % X 3 years) plus premium on redemption of 30,000 (15,000
itey
SOLUTION:
Requirement No. 1
24929
15.000
Finap,
Prepare the journal entries in 2021 and 2022.
23,580
15,000
Requirement No. 2
Journal entries are:
REDEEMED
Required: (Carry all decimal places during the computation)
15,000
equity is
CONTRACTUALLY
AT A PREMIUM OR DISCOUNT
If the preference shares are to be redeemed contractually at a premium or
discount, the liability will need to be accreted over time such at the
redemption date, the carrying amount of the liability is equal to the
redemption price. The accretion of the redemption premium attributable to
an accounting period will be presented together with the accrued dividends
as interest expense for that period in the profit or loss. On the other hand,
the accretion of the redemption discount shall be deducted from the interest
expense for that period.
2)
Aot
il Statemeng Presentation (2021)
eNtof Financial Position (Non-current liability section)
Teference g,
emium o ares
Totg)
N redemption of pref, shares
temep,
Inte, "l'“'m“expe“:ee
O COMpreh ensive Income (2021)
21
P 150,000
ng%—
» 23580
N Ok p, Mty
:
Characteristics
in which one
t,
men
tru
note is a financial ins
1130
(%] CamScanner
Chapter 27 -Financial Liabilities and Debt Restructuring
crapter 27
party called the maker or issuer promises in Wwriting tg
a sum certain money to the other party called the
BSEQUENT MEASUREMENT: NOTES PAYABLE
5"
either on demand of the latter or at a fixed or determingpj,
future time.
When the entity becomes a party to the contract or When
Recognition
transfer of resources transpired
Presentation | Presented in the liability section in the statemen;
financial position and classified as to either current or ngy.
current depending on the expected settlement date,
able are subsequently measured at amortized cost
ttes P2interes t method of amortization
oHieing; the
effective
[Lw;rMTION: Issuance of lnter.esl-eriru Note - Lump Sum
onjanuary 1, 2021, Aklan Co. acquired a machine from Antique Co. In lieu of
qsh payment, Aklan gave Antique a 3-year, P600,000, 3% note payable.
principal is due on December 31, 2023 but interest is due annually every
December 31. The prevailing interest rate for this type of note is 10%.
Required: Compute
SOLUTION:
In the given data, no information is available to measure the note's fair
value. Thus, the note shall be measured at discounted or present value.
PoXX
XX
XX
Furthermore, in the absence of fair value, the notes shall be measurffl:;
discounted or present value. The following diagram shows the baswm
measuring the long-term notes payable’s discounted or present value on
date of initial recognition.
__Measurement_,
Characteristics
Nominal interest rate
approximates the
prevailing market rate or
Nominal interest rate is
substantially different
with market rate
»
The note bears an annual interest of 3% which is significantly different with
market rate of 10%. With this, the note shall be initially recognized on
January 1, 2021 at present value of principal and interest payments.
Present value of Principal (P600,000 x 0.7513)
PVofinterest payments (600,000 x 3% x 2.4869)
PV of principal 304
interest paymen®
P is equal 03
liabilities
Issued for non-cash assets
al e("
B e ollowing
* Note: Any difference between the face amount
on Notes Payable,
1131
shows the amortization of the note.
Amortization table:
Date
L——
Issued solely for cash
and measurement basis is debited to Discount
Present value of the notes payable
order of prio9”
a, Cash pric®
equivalent
b PV of princi?®
P450,780
44,764
_P495,544
Suhsequently, it will be measured at amortized cost. The following table
Face amount
Non-interest
bearing
of the note payable on
Face amount
Less: Discount on Notes Payable
Net Carrying Value
is considered to be immaterial.
liabilities
carrying amount
December
31, 2021.
INITIAL MEASUREMENT: NOTES PAYABLE
Notes payable shall be initially measured at fair value minus transaction
cost. However, PFRSs allow short-term notes payable to be measured at
face amount since the difference between the face amount and its fair valie
Interest bearing
for the
The net carrying value is to be reported on the face of the
SFP as part of the liabilities section. Net carrying valueis
determined as follows:
Category
—Financial Liabilities and Debt Restructuring
6 12023
™e
Interest
Payment
Interest
expense
18,000
49,554
52,710
18,000
Discount
__ Amortization
56,191
18,000
31,554
34,710
38191
Present
_value
P495,544
527,099
561,809
P600,000
p_522,099
Amouny, 12/31/2021
"lh?"ylng amount is to be presented in the noncurrent
liability secrfll;n
amount of
position because the principal
of financial
l“‘nahme"t
Yable beyond
one year from the reporting date
form,
)
L1 reZ:::ré? to record transactions in 2020
gii:chine
e issuance of the notes
po7 NOtes payable (600,000-495,544)
Notesount
S Paya
ble (@ face amount)
the
T
456
000
1044560
1132
(%] CamScanner
opter 27 -Financial Liabilities and Debt Restructuring
Chapter 27 -Financial Liabilities and Debt Restructuring
2.
Torecord interest payment
Interest expense
P18,000
Cash
3.
tization Table:
Amor!
‘Annual
Payment
18,00
To record amortization of discount
Interest expense
Discount on notes payable
200,000
200000
P31,554
200000
P31554
ILLUSTRATION: Issuance of Non-Interest Bearing Note with One-Time
Payment of the Principal
On January 1, 2021, Capiz Co. acquired a machine from Guimaras Co. In lie
of cash payment, Capiz gave Guimaras a 3-year, P600,000 noninterestbearing note payable due on December 31, 2023. The prevailing rateof
interest for this type of note is 10%.
Notes payable
Discounton N/P
Carrying amount
December 31,2021
12/31/2023
49,738
34712
150,262
value
P497,380
347,118
181830
:
165288
18170
Present
181830
Total
Current
Noncurrent
P400,000
52,882
P347,118
$200,000
34,712
P165288
$200,000
18,170
P181830
The gross current note payable of P200,000 is amount payable within one
yar from the reporting date whereas the P200,000 noncurrent note
SOLUTION:
Present value of principal (600,000 x 0.7513)
Amortization table:
Interest expense
Date
12/31/2021
12/31/2022
Discount
Amortization
The amount to be reported on December 31, 2021 as net liability is
347,118, It is divided into current and non-current liabilities in the
statement of financial position as follows:
Required: Compute the amount that should be recorded as a net liabilityon
01/01/2021
Interest
__expense
Fyableis the amount payable beyond one year from the reporting date.
P450,780
ILLUSTRATION: Noninterest-bearing Note - With Cash Price Equivalent
1
Present value
450,780
’m.OOO and a cash price of P497,380 by issuing 3-year P600,000
*oninterest-bearing note payable. Principal is due in equal payments every
600,000
Ferpolated for the cash price is 10%.
:]fll_:hlrtd: Determine the following:
2) " Carying amount of the note on initial recognition.
495458
sa54
45,078
49,586
On January 1, 2021, Oriental Co. acquired inventory with a list price of
54,556
P495,858, carrying amount on 12/31/2021 to be presented ";“‘;:
noncurrent liability section of the SFP because the principal amount
note is payable beyond one year from the reporting date.
ber 31 beginning on December 31, 2021. The effective rate of interest
The €rrying amount of the note for the year ended December 31,2021
ILLUSTRATION: Issuance of Non-Interest Bearing Notes with UnlP™
h‘“::non:
Payment of the Principal
The gIre, hent 1 .
a
On January 1,2021, lloilo Co. acquired a machine from Negros Cocash payment, lloilo gave Negros a 3-year P600,000 non(merfim
note payable. Principal is due in equal payments every Dece
3
of the note on initial recognition is equal
"“!um:g""“’um
380,
Amg,
beginning on December 31,2021.
Interest
The prevailing rate of interest for this type of note is 10%-
Required: Compute the amount that should be recorded as a
net 2 biliy**
December 31,2021
SOLUTION:
Present value of principal (200,000 x 2.4869)
1133
0
497,38
=5
12
!
200,00
W
o
-~
200,000
Discount
rtization
712
18,170
3
i
181,830
remeng5,
ount, 12/31/2021 (see amortization table above)
to the cash
Present
value
497,380
X
347118
1134
(%] CamScanner
Chapter 27 -Financial Liabilities and Debt Restructuring
27 Financial Liabilities and Debt Restmnunng
Notes:
1 ‘When the principal amount is payable lump-sum
The entire present value at the end of the reporting period shy)
presented as noncurrent liability not unless that the liability j5
be
within one year from the reporting period in which case it shall
pe
presented as current liability
When the principal amount is payable periodically
The present value shall be divided into current and noncurrent liability oy
unless that the liability is payable within one year from the Teporting perio
in which case it shall be presented as current liability.
LOAN PAYABLE
Description
Recognition
Presentation
Characteristics
Financial liabilities other than short-term trade payableson
normal credit terms. It is similar to notes payable except
that this borrowing is normally obtained from financialor
lending institution.
When the entity becomes a party to the contract or whea
transfer of resources transpired.
Presented in the liability section in the SFP and classified
to either current or non-current depending on the
settlement date.
ON:
sot"m"!m,nmo.x
o
Joan bears an annual interest o
Wwhich is presumed to approximate
‘market rate. With this, the note shall be initially recognized on January
12021 at face amount of $2,500,000 adjusted by transaction costs,
PC 2500,000 )
feamount
Lomorigination fees (5% x P2.5M)
siial carrying amount of loans payable
£2 375,000
Requirement No. 2
To amortize the loan, a new effective rate shall be computed through
iterpolation or trial and error technique that will approximate the amount
received from issuance of the loan.
In determining the rate to be used, let us use the basic concept that if
effective rate is higher than its nominal rate, the item is issued at a discount.
Considering the loan was issued at a discount, we expect that its effective
rateis higher than its nominal rate of 10%.
Initally, let us try 12%.
Present value at 12%
PVof principal (P2,500,000 x 0.5674)
PVofinterest (2,500,000 x 10% x 3.6048)
P 1,418500
901200
Total present value
INITIAL MEASUREMENT: LOANS PAYABLE
action
Loans payable shall be initially measured at fair value minus trans
cost.
SUBSEQUENT MEASUREMENT: LOANS PAYABLE
¢ using ¢
Loans payable are subsequently measured at amortized cos!
ILLUSTRATION: Loans Payable
0,000
On January 1, 2021, Occidental Co. borrowed 10%, P2.50
Ater the Second rate is computed, we can say that the effective rate for
n is between 12% and 10%. With this, we can compute the
elective interest by using ratio and proportion as follows:
ey350
loan from National Bank. Interests are payable annually slam_fllnm .
31, 2021. National charges 5% non-refundable loan origi
Required: Determine the following:
uy
Totg]
2,500,000 }
$2,375,000
g MutatiopWerence
|
LIe
1135
Gap%
Tog Presentvale
emte
!
2021
Carrying amount of the loan payable on December 31,
2023
Total interest expense for the year ended December 31,
Gapin?
ey
representing service fee.
1) Carrying amount
of the loan payable on January 1, 2021
£2319.700
Secethe present value at 12% is lower than the initial carrying amount, we
Pectalower effective interest rate. Note again that there is no premium or
so if we get the
i ™ if the effective is the same as the nominal rate
is equal to the
value
the present
h:‘lvr:l“e"'* 0f 10% as the effective rate,
effective interest method of amortization
2)
3)
e
P 1250
e
} p 55300
$2,319,700
Ll
PL60300
"lon using the lower rate as a starting P?‘c" f
W “rrate
s [(HR-LR)
pVof LR-PVO
X ~pyofLR-PV
ol HR ]
1136
(%] CamScanner
er 27 _Financial Liabilities and Debt Restructuring
Chapter 27 —Financial Liabilities and Debt Restructuring
"
10% + [(12%- 10%)
X
X = 1139%
125,000
* “Ts0300
180,300
(nap!
]
t forgiveness
1) :::Jet swap - payment through transfer of noncash asset
g Fquity swap - conversion of debt, wholly or partially, into equity.
1) Modification of terms (e.g., debt rescheduling; modification of interest
or maturity value or both; exchange of debt instruments with
aubstantially different terms)
Computation using the higher rate as a starting point:
% Ve
(PV ofX-PV
of HR)
= Higherrate- [(HR-LR)
X = 12%-[(12%-10%)
X
=
X TpyoriR-pvorar ~ |
X
125,000
DEBT FORGIVENESS
“1gp300
Libility may be extinguished thru forgiveness of the debt by the creditor.
The carrying amount of liability forgiven is simply recognized as gain on
atinguishment of debt by the debtor in profit or loss.
1139%
Legend:
LR - Lower rate
HR - Higher rate
PV - Present value
Amortization table using 11.39%
Date
01/01/2021
12/31/2021
12/31/2022
12/31/2023
12/31/2024
Interest | Interest
Discount
Payment | Expense | Amortization
Carrying
e
250,000
250,000
2,375,000
2,395432
2,418,190
250,000
250,000
ories of Debt Restructuring
n;i‘,eszrucl“ri“g may involve the following:
270,432
272,758
275,350
278,236
12/31/2025 250,000 278,224
The difference is due to rounding off
20,432
22,758
25,350
28,236
28,224
Carrying value - 12/31/2021 see amortization table)
Value
ILLUSTRATION: Debt Forgiveness
Negros Co. provided the following balances on December
31, 2021:
e Notes.
Required: Provide the journal entry for 2021 in the books of Negros.
2500000
SOLUTION:
5
239548
Requirement No. 3
Total interest expense - 12/31/2023 (see amortization table) _p
2538
f
s
“:‘e Payable (40% x 1M)
P400,000
“Med interest payable
100,000
“inon extinguishment of debt
Bagger Wap or “dacion en
Debt restructuring is a process that allows entities facing " SS::
debts in order to improve or restore liquidity and rehabilitate s© 'h",“m
55, .8 AMOUNt of asset given
g
"
x“lflijT;RlATmN: Asset Swap
its
Debt restructuring could either be a legal requirement or mu tualagref':
ot
between a financially troubled debtor and its creditors to re€0l i
1137
Lns;/(é:z;"g amount of liability extinguished
&,
debt, minimizes unfavorable consequences of noncompliance !
i
of
by delivery
pago”,* the
the liability
liability is is extinguished
4
h:\.fifj‘f"fl by the debtor. Gain or loss on extinguishment of debt to be
Camyps PRt o loss for the period is determined as follows:
problems and financial distress, to reduce and renegotiate its dellfl?[ @
liabilities as a more feasible alternative to foreclosure or liquidatio™
P500,000
ASSET
s,
DEBT RESTRUCTURING
agreements, or takes advantage of lower interest rate.
100,000
&nl):(emher 31,2021, the creditor forgave the accrued interest and 40% of
2,443,540
2,471,776
continue its operations. Debt restructuring aims to avoid default O
P 1,000,000
Note payable
Accrued interest payable
X
X_A&
On extinguishment of Debt
% "' Provided the following balances on December31, 2021:
h‘e Payable
P 1,600,000
200,000
“dinterest payaple
1138
(%] CamScanner
_financial Liabilities and Debt Restructuring
crapter 27
uished.
ncial liability exting
air value of the fina ility extinguished
nt of liab
3 erying amou
Chapter 27 -Financial Liabilities and Debt Restructuring
On December 31, 2021, the entity transferred to the creditor land Tecordej
at a cost of P1,500,000. As of this date, the land has a fair Value of
£2,000,000.
LLUSTRATION: Equity Swap
Required: Determine the amount of gain or loss to be recorded in the 5¢|,
Lapulapu Corporation showed the following data on December
31, 2021:
Carrying amount of land
Less: Carrying amount of liabilities extinguished
Notes payable
P 1,600,000
Accrued interest payable
200,000
Gain on extinguishment of debt
Note payable
0n December 31, 2021, the entity issued share capital with a total par value
«(#2,000,000. Both share capital issued and bonds payable are quoted in
anactive market at P4,400,000 and 4,700,000, respectively.
_1,800,000
£_300000
Required: Determine the following:
1) Gainor loss to be recorded in the SCI
7) Amount credited to share premium from the extinguishment of the
1,600,000
Accrued interest payable
Land
Gain on extinguishment of debt
200,000
liability
1,500,000
300,000
SOLUTION:
lg_qulremem No.1
Gnorloss on extinguishment of debt
EQUITY SWAP OR DEBT FOR EQUITY SWAP
.
In equity swap, the liability is extinguished through issuance of own equiy
securities by the debtor to the creditor. However, debt-for-equity is
applicable to the following situations:
ltitil measurement of share capital issued
P 4,400,000
Lss:Carrying amount of liabilities extinguished
Eonds payaple
£ 4,500,000
o
a. The creditor is also a direct or indirect shareholder and is acting
capacity as a direct or indirect existing shareholder.
b. The creditor and the entity are controlled by the same party or P
|
4
Kcruedinterest payable
arisi;
ineui ishment
it1€ premium rising
from extingu
of bt debt
?'P':!asnrement of share capital issued
Extinguishing the financial liability by issuing equity shares
f debt &
Under debt-for-equity swap, gain or loss on extinguishment ©
by
‘(M’!‘F;i_yahlz
\
)
determinable, use the fair value of liability)
2
Less: Total par or stated value of equity issued
Share premium (or discount)
fi
*Initial measurement of share capital issued
porpirt®
When equity instruments issued to a creditor to extinguish 2 e
financial liability, an entity shall measure them at (in order of P™
Fair value of the equity instruments issued
1139
cfl""’“mium
i
on
£2400.000
$4,500,000
interegy
2 | iary g
Fair value of equity instruments issued (or if mnot reliabl/
2000000
tobe credited to share premium
bl
2
of share capital issued*
Initial measurement
Less: Carrying amount of liability extinguished
Loss/(Gain) on extinguishment of Debt - P&L
P4:400000
mmf value of share capital issued
accordance with the original terms of the financial liability.
determined as follows:
B(400,000)
Yuirement no, 2
s
includes an equity distribution by, or contribution to, the entity.
_ 4,800,000
“on extinguishme
nt
of debt
before and after the transaction and the substance of the transa®
1.
300,000
Accrued interest payable
P 1,500,000
Torecord
the transaction
c.
P 4,500,000
Bonds payable
SOLUTION:
300,000
920l
#2000,000
2,400,000
eyt
“xtinguishment of debt
#0040
0
DI,
Vg i‘"fiua,.
CATIONoftey Op TERMS
3 deb,
s
fthe following:
terms may involve
i
one or com! bination
x of .
b¢ pon
€Scheduling or modification of maturity date: |
Modi Cation of interest or maturity valueor
bothi81
|
Mge of debt instruments with substantially different
terms
1140
(%] CamScanner
JA er 27.
Costs or Fees Incurred During Modification
i
I an exchange of debt instruments or modification of terms is
g3
the
of
part
as
recognized
1. accounted for as an extinguishment
loss on the extinguishment.
2. Not accounted tg:r as an extinguishment - adjusted to the carnté
Whether the modification is substantial or not, gain or loss
in P&L will be computed as follows:
t be
red ,,!nlx:d
L
Gain or loss on extinguishment of debt
te
~Present value of the modified terms using the original EIR
3
Less: Carrying amount of liability
B
| 8%
¢s
BN
35|EE | 257
2
2E
53
3
53
H|
AR LR
L,
E3d
h
15852
SN
|=f£a | |3E¢
5SE° |
g2
23E
Ez
B S
1832
s
g2 | |
83
K]
;|
LR
&3
-
]
| ;;3
¢
E®
|
|
|
|
zK
s
=
K]
3
§8
fi2
g
8
8
/
Loss/(Gain) on extinguishment of debt - P&L
{
amount of the liability and are amortized over the remaining
modified liability.
A
L
2
5Bz
the gain or loss on extingulshment
recognized in P&L.
%B
Costs or fees Incurred as part of
modification are recognized as part of
gain
original effective interest rate. As a result, a one-off
09
-|
2
ir value of new debt)
contractual cash flows that are discounted at the financial instramests
or Toss 8
SUMMARY OFDEBT MODIFICATION
————Suene
Non substantial Modification
The terms are considered not to be substantial if the discounted present
value of the cash flows under the new terms, including any fees paid netof
any fees received and discounted using the original effective interest rate,is
less than 10% different from the discounted present value of the remaining
cash flows of the original financial liability.
When a financial liability measured at amortized cost is modified ‘without
the
this modification resulting in derecognition, an entity recalculates
future
the
of
value
present
the
as
liability
amortized cost of the financial
15 the modiication considered to be a substantial modification?=1
entity accounts the modification of terms or substantially different termsas
an extinguishment of the original financial liability and the recognitionof s
new financial liability.
O
AN
&S
(‘extinguishment accounting’)
For exchange of debt instruments with substantially different terms, the
Account for the modification as an
cash flows of the origing]
Accounting
the original effective interest rate, is at least 10% different rm,,”:,
g il |
Account for the modification as an
extinguishment of the existing liability
and the recognition of a new liability
different if the discounted present value of the cash flows under the e
terms, including any fees paid net of any fees received and discounted u‘:‘lIw
discounted present value of the remaining
financial liability.
N
22
|
As provided by paragraph B3.3.6 of PFRS 9, the terms are substayy;
_Financlal Liabilities and Debt Restructuring
ference between the
Substantial Modification
Recognize the new liability at fair value
Chapter 27 ~Financial Liabilities and Debt Restructuring
1141
1142
(%] CamScanner
Chapter 27 -Financial Liabilities and Debt Restructuring
opter 27 -Financial Liabilities and Debt Restructuring
ILLUSTRATION 1: Modification of Terms - Substantially Modifieq
tantially Modified
fication of Terms - Not nalSubsBank
JUSTRATION 2: Modi
of P8,000,000. The
‘apu Company has12%.a note payable to Natio
pote bears interest of
Mandaue
Company
has an overdue
note payable to National
£8,000,000 and recorded accrued interest of P840,000, based o 1y
interest rate.
As a result of a settlement on December 31, 2020, National Bank agresdyy
the following restructuring arrangement:
o
Reduced the principal obligation to #7,000,000.
«
Forgave the PB40,000 accrued interest.
s
Extended the maturity date to December 31, 2022.
o Annual interest of 10% is to be paid on December 31, 2021 and 2022
Required: (round off present value factor into four decimal places)
1. Compute the gain or loss to be recorded in the SCI
2. Prepare the necessary journal entries
SOLUTION:
Requirement No. 1
Fair value of new liability:
PV of principal (7,000,000 x 0.7972)
P 5,580,400
_1.183.070 £6,763470
PV of interest (7,000,000 x 10% x 1.6901)
Less: Carrying amount of liabilities extinguished:
i
Notes payable
P 8,000,0
Accrued interest payable
_g840000
Gain on extinguishment of debt
w
te
determin¢
to
used
was
12%
of
rate
interest
*Note: The original effective
present value factors.
fthe
Computation of the percentage of gain or loss over carrying amount ®
old liability
Percentage
=
P2,076,530
P8,840,000
Since the gain is more
than
=
conside™
10%, the debts instrumen! t dlsxmmtd““”
“substantially different terms". Hence, the gain is recognize
£8,000,000
840,000
236,530
Discount on notes payable
Notes payable (new)
Gain on extinguishment of debt - P&L
1143
Required: (round off present value factor into four decimal places)
1. Compute the gain or loss to be recorded in the SCI
1 Prepare the necessary journal entries
SOLUTION:
Requirement No. 1
Fairvalue of new liability:
PVofprincipal (8,000,000 x 0.7972)
P 6,377,600
Pofinterest (8,000,000 x 10%x 1.6901)
_1352.080
Less: Carrying amount of liabilities extinguished:
Notes payable
P7.729,680
8,000,000
Ginon extinguishment of debt
P_270320
"Note: The original effective interest rate of 12% was used to determine the
Present value factors.
Unputation of the percentage of gain or loss over carrying amount of the
odliabiliey
Peentage =
pa70320
=
3.38%
$8,000,000
S5 the g 5 less than 10%, the debts instrument is considered "not
in the
taly different terms", However, the gain is til recognized
“"wh k:‘ment No,o. 2
7 0teS payable
70,320
peha
.Caiy M modification of debt
270,320
i "“ry of classification, measurement (initial and subsequent) and
‘\n::n of different categories of financial ""’g:;’:
:nnafld'l
and the old liability is derecognized.
Notes payable (old)
Accrued interest payable
+ Annual interest of 10% is to be paid on December 31, 2021 and 2022
torloss,
2349%
Requirement No. 2
Asaresult ofa senleme‘nl on December 31, 2020, National Bank agreed to
e following restructuring arrangement:
+ Extended the maturity date to December 31, 2022,
fFipauu
v oDO,WD
2:075 530
" | Financial liabilities at fair
value through profit or 105
liabilities measured at
amortize! d 1o cost
PL]
Like the equ'i:::gm
classification for financial
Iffinancial ":hfl::;s'r ;r:
a ed &
r‘;‘fll ma:-:sr‘v.::sur
financial liabil
2
lude
assets, this willitiinc
es incurred__1
;zmlm s
1144
(%] CamScanner
Chapter 27 -Financial Liabilities and Debt Restructuring
interest rate
Remeasurement | Held for trading - profit or
N/A
gain or loss
|
loss
‘
Designated as FVTPL
i. The amount
of change in the
fair value that is
attributable to changes in
the credit risk of the
|
liability - Other
comprehensive income
|
ii. The remaining amount of
change in the fair value of
the liability - profit or loss
|
(ocn
|
Derecognition
Ifit would create or enlarge an
accounting mismatch in profit
or loss, present all unrealized
gains or losses on that liability
(including the effects of
changes in the credit risk of
that liability) in profit or loss.
| When discharged, cancelled, expires or sllhs""tial
Derecognition
| Consideration paid less carrying value - gaif 07 Ly
gain or loss
modification of terms
|
[
|
Applied Auditing by Asuncion, Ngina & Escala
expense (ifany) | rate
|
|
Net loss (gain) - PBL
method
Based on effective
|
Statement of
Comprehe
« Unrealized & realized
galn or loss
o Interest expense
Based on nominal or stated
effective interest
Direct Method
Issuance for cash - Add
Retirement price - Deduct
Interest paid - Deduct
Interest
measurement
Statement of Cash Flows'
Operating activities.
transaction cost
Amortized cost using
Financial Statements
Fair value
«
«
Subsequent
Statement of Financial
Position
Current liability
(i.e, minus)
Fair value
transaction cost
Fair value, reporting date
measurement
SUMMARY OF ACCOUNTING FOR FLEFVTPL
Initial
Initial
recognition
Indirect Method
Increase in FLOFVTPTL - Add
Decrease in FLOFVTPTL - Deduct
opter 2 7 ~Financial Liabilities and Debt Restructuring
for trading purposes and also
derivatives that are not part of
a hedging arrangement.
Financial liabilities are recognized on the SFp. When the
entity becomes party to the contractual provisions. ofthe
instrument.
Fair value excluding
Fair value including
|
5501
derecognition to P&L
1145
1146
(%] CamScanner
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o
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1148
1147
Financial Liabilities and Debt Restructuring
27
oupter
Chapter 27 -Financial Liabilities and Debt Restructuring
CamScanner
Chapter 27 -Financial Liabilities and Debt Restructuring
e
o
27 _financial Liabilities and Debt Restructuring
1 3l|
&,
£
52
35
355
HIH
2
"PIEL)
%
Applied Auditing by Asuncion, Ngina & Escala
S
BLEM 27-1 Financial Liabilities at FVTPL
n‘;mm 1, 2021, Oroquieta Co. issued 3-year bonds with a face value of
mm,aan for #2,850,756. The bonds carry an interest of 8% per year payable
00 December 31. On the date of issuance, the company incurred and
pualy
:?:;‘l,};musinn to underwriters of P15,000.
The bonds are to be appropriately classified as financial liabilities at fair value
rough profit or loss. On December 31, 2021, the bonds are quoted at 103%.
Assume that there are no changes due to credit risk.
Onfanuary 1,2022, the bonds were retired at 104.
)
Questions:
gased on the above data, answer the following:
+How much is the unrealized loss (or gain) in 2021 to be recognized in the
profitor loss?
c P269,244
2 Nil
1 3E
&
d. #3000
b 1239244
2 Howmuch is the interest expense for 20217P294541
(g8
si i
EFg<y
g3siziy
EHIERHE 8
[|55%5g
85| | g8H
82
B2 ||"25¢
H 5|
bA
H
Hi
¢
4 9240000
d. P114104
b #285076
3. How much is the realized loss (or gain) on derecognition in 2022 to be
c. P269,244
d. £30,000
2o o
PROBLEM 27.2 Financial Liabilities at FVTPL
with 2 par ¥t
bond
&:year
a
issues
Co.
Tubod
2021,
1,
pJinuary
900,000 and an annual fixed coupon rate of 10%, which is consistent wi
x Effective Interest
rate
= Amortized cost, beg.
Derecognition gain or
loss
Financial Staty
Amortized cost
recognized in the profit or loss?
a Nil
b 239,244
Falr value less
transaction cost
SUMMARY OF ACCOUNTING FOR FL@AC
les:
of discount - Add
APTER2ZT: . REVIEW QUESTIONS - COMPUTATIONAL
ilar characteristics.
:u.k“ fates for bonds with sim
e of nception of the
ed (benchmark] interest rate. At the dat
erv
obs
uses
404
4 s,this rate is 995
tthe eng of the first
year:
se! dto
X
erest rate has decrea
!n;ld (hen:hmark) int
ds s
g alue inerest rate ofthe bonire
i :uary 1,2022, the bonds were ret d at 104
8.00%
10.00%
Jar
in the Iabl
d veto present the efects of hanges
irensi
Te0ehe
Ol MPr
income.
ionss;,
VestMon
ty's creditrisk in
’huu!'::u‘th: above data, answer the following: (Cary over afl dec al places
[
1149
in
tion of present value)
1150
(%] CamScanner
Chapter 27 —Financial Liabilities and Debt Restructuring
1.
How much is the unrealized gain or loss to be recognized in th,
20217
a Nil
b P148,032
2.
c. P155,152
d. P303,184
00 during
How much is the unrealized gain or loss to be recognized in the P&L
20217
a Nl
b P148,032
3.
c. P155,480
d. P303,184
during
rer 27 _Financial Liabilities and Debt Restructuring
[
"+ onjanuary 1, 2021, Lanao del Norte Company Co. issues convertible bonds
with a maturity of five years. The issue is for a total of 1,000 convertible
bonds. Each bond has apar value of P1,000, a stated interest rate of 5% per
ear,and is convertible into 5 ordinary shares of Lanao del Norte Company.
The convertible bonds were issued to Lanao del Sur Company at par. The
per-share price of Lanao del Norte share is 15. Quotation for similar bonds
jssued by Lanao del Norte without the conversion privilege suggest that
they can be sold for P900,000.
on January 1, 2021, it issued 10%, 3-vear bond with face value of
How much is the realized loss (or gain) on derecognition in 2022 to b
recognized directly in the equity?
a. Nil
P11,968
b.
#5,000,000 at 98. Additionally, Lanao del Norte Company paid bond issue
cost of P140,000. After consideration of bond issue costs to the initial
measurement, the calculated effective rate is 12%. The interest is payable
annually on December 31. Lanao del Norte Company uses the effective
interest method in amortizing discount and issue cost.
On January 1, 2021, it issued 5-year bonds with face value of 5,000,000 at
110. The company paid bond issued cost of P80,000 on same date. The
stated interest rate on the bonds is 8% payable annually every December
31. After consideration of bond issue costs to the initial measurement, the
bonds were determined to yield 6% per annum.
c. P143,184
d. P160,000
PROBLEM 27-3 Financial Liabilities at Amortized Cost
The following transactions transpired for NCPAR Company in 2021:
*
On January 1, 2021, it issued 3-year bonds with a face value of 1,200,000
and stated interest of 8% per year payable annually on December 31. The
bonds were acquired to yield 10%.
*
OnJanuary 1, 2021, it issued 3-year bonds with a face value of 1,200000
and stated interest of 8% per year. The bonds mature in 3 equal annuzl
installments every December 31 and the interest are also payable every
On December 31, 2021, it issued 5,000 of its 8% 10-year P1,000 face value
+
bonds with detachable warrants at 110. Each bond carried a detachable
warrant for 10 ordinary shares of Lanao del Norte Company’s P100 par
value at a specified option price of P120. [mmediately afier issuance, the
December 31. The bonds were acquired to yield 10%.
market value of the
Both bonds were appropriately classified as financial liability at amortized cost
Questions:
Based on the above data, answer the following: (Round off present value fa%
up to four decimal places)
1.
2.
Nil
1,200,000
c. P1,140,302
d. 1,051,730
Basedon the above data, answer the following:
e issuance of convertible bonds increased Lanao Del Norte's quity by
¢ 976923
+ $100,000
P96,000
P114,030
3.
How much is the issue price of the serial bonds on January 1, 20217
a. P1,158926
c P1,432,125
b. P907,875
d. P896,042
4.
How much is the interest expense of the serial bonds for 20217
a. P174,604
c. P107,934
b. P143212
d. P115,892
PROBLEM 27-4 Financial Liabilities at Amortized Cost - Transacti”
n €05
in202F
The following transactions transpired for Lanao del Norte Company !
1151
d. Nil
+ 000,000
¢ 4,848,600
The carrying amount of the convertible bonds on December 31,202115
<. P938.0B5
b 1on00000
d. P882,680
P32
year 2 bonds
the carryiing amount of the 5¥¢
is
t
wha
1,
202
31,
""
c?"
' g:y:)fiR
¢, P5414800
b petan
4. #5,000,000
75345.200
ble on December 31,
Xhz‘ll?'s, the carrying value of the 3-year bond Py
c P117.817
d. P114,104
Convertible Bonds and With Detachable Warrants
b #75,000
2
How much is the interest expense of the term bonds for 20217
a.
b.
without warrants was P4,800,000 and the
Questions;
How much is the issue price of the term bonds on January 1, 20217
a.
b.
bonds
market value of the warrants was $1,200,000.
5
" 4840400
d. p4,831.200
)
§
-year bonds
31, 2021, what s the carying 270" of the 10
P mber
Sued
a
'5:500,000'"“}’ warrants?
<. $5,000000
1152
CamScanner
Chapter 27 -Financial Liabilities and Debt Restructuring
b.
P4,800,000
d.
capter 27 -Financial Liabilities and Debt Restructuring
o much Is the amount to be recognized in profit o loss as a result of the
P4,400,000
induced conversion?
e
PROBLEM 27-5 Retirement of Bonds Payable
On December 31, 2021, Tacurong Company had outstanding 12%, ps, 000,
face value bonds maturing on December 31, 2026. Interest was
!:o
semiannually every June 30 and December 31 On December 31, 202, s
amortization was recorded for the period, the unamortized bond d|szoul’1t a,,;
bond issue cost were P500,000 and P300,000, respectively. On that day,
Tacurong acquired all its outstanding bonds on the open market at 99 35y
retired them. On December 31, 2021, what amount should Tacurong recognize
as pretax loss on early extinguishment of bonds?
a. P700,000
c. P400,000
b.
$200,000
d.
Nl
b.
The following transactions transpired for Cabadbaran Company in 2021:
o OnApril 1, 2020, Cabadbaran Company borrowed P5,000,000 and signed a
2.year note bearing interest at 12% per annum compounded annually.
Interest is payable in full at maturity on March 31, 2022.
On August 1, 2021, Cabadbaran Company’s 2,000,000, one-year non-
interest-bearing note due July 31, 2022, was discounted at Munda Bank at
108%. Cabadbaran Company
On January 1, 2021, General Santos Company converted its 12%, P1,500,000
face value bonds payable with a carrying amount of P1,552,049 for 20,000
ordinary shares with a par value of P50. The bonds were originally issued to
equal annual principal payments of P450,000. On this date, the bank's
prime rate was 11%. The first annual payment for interest and principal
was made on September 1, 2021.
National Bank grants a 10-year loan to Cabadbaran Company in the amount
0fP1,500,000 with a stated interest rate of 6%. Payments are due monthly
and are computed to be P16,650. National Bank incurs P40,000 of direct
Questions:
CASE NO. 1: Assuming that the bonds are convertible bonds and the share
premium from conversion option was P60,000.
1. How much is the gain (or loss) on conversion of the bonds to be recognized
in the profit or loss during the period?
c. P612,049
d. P600,000
¢
Nil
PROBLEM 27-7 Induced Conversion
le bonds
On January 1, 2020, Cotabato Co. issued P1,500,000, 12%, converti (ol ns
4 years. The bonds were sold for $1,595,082 and are convert!
due after
P10 par ordinary shares at a conversion price of P25 per share.
to
ordinary share, reduced the conversion price to P20 per share for bflflbflnds s
the
that converted within 40 days. On this date, the fair value of
the date
Al the bond holders accepted the offer on December 31, 2021. 0; - r sharé:
conversion, the fair value of the Cotabato Co.’s ordinary share is P30 P
1153
of indirect loan origination cost. In
Telation to the 2-year note bearing intereston December 31,20217
4 91,200,000
¢ P1,104,000
b. 1,100,000
d. 1,050,000
to Munda Bank
What amgunt should Cabadbaran report for notes gayzhla
t l position?
1its December 31, 2021 statemen
of financia
10,000
P19
c.
b 2000000
00,000
1,2
d.
L o Taraon
uld Cabadbaran rephrtas accrued
i :.': December 31, 2021, what amounte sho
dage Bank?
Tanl
to b
paya
JMerest payable i relation to the not ¢, P49,500
On December 31, 2021, Cotabato Co, to induce conversion of the ho;::li:fi
1,600,000 and the bonds have a carrying amount of P1,552,049-
P20,000
Eiud onthe above data, answer
the following:
)
.
i
Whatamount should Cabadbaran reportas a liability for accrued interestin
P612,049
d. P600,000
(P47,951)
cost and
origination fee.
~
b.
loan origination
addition, National Bank charges Cabadbaran a 4-point nonrefundable loan
Questions;
CASE NO. 2: Assume instead that the bonds are nonconvertible and the
transaction happen because of the equity swap.
cognied
2. How much is the gain (or loss) on conversion of the bonds to be re
in the profit or loss during the period?
a.
uses the straight-line method of amortizing
discount.
+ OnSeptember 1, 2021, Cabadbaran Co. borrowed P1,350,000 note payable
from Tandag Bank. The note bears interest at 12% and is payable in three
yield 10%. The fair value of the bonds on the date of retirement is £1,600,000.
Nil
(P47,951)
d. 1,252,049
PROBLEM 27-8 Interest-Bearing Note
P100,000
PROBLEM 27-6 Conversion of Convertible Bonds
a.
b.
c. P750,000
450,000
g
b0
d. p33,000
136000
iallyat
ona! | bank nit
to Nati,
ble 10 ¥
will report theloan payable
Fy
& -by gpgunruill
d. 11,440,000
480000
1154
(%] CamScanner
Chapter 27 -Financial Liabilities and Debt Restructuring
crapter 27 _Financial Liabilities and
PROBLEM 27-9 Debt Restructuring
Isulan Company is indebted to a bank under a P6,000,000, 10% three-year
dated December 31, 2018. Because of financial difficulties, Isulan owed a o}
7ROB!
Sajanuary 1 2021, Sarangani Company showed the followin &
interest of P600,000 on the note on December 31, 2021. Under a‘::
restructuring on December 31, 2021, the bank agreed to settle the note
accrued interest for a tract of land having a fair value of 5,000,000 Ty
acquisition cost of the land is P3,500,000. In its 2021 statement of
comprehensive income, Isulan should report gain on extinguishment of debt at
a.
b.
P1,000,000
P2,500,000
c. P1,600,000
d. 3,100,000
PROBLEM 27-10 Debt Restructuring
Due to extreme financial difficulties, Koronadal Company has negotiated 2
restructuring of its 10%, $5,000,000 note payable due on December 31, 2021
The unpaid interest on the note on such date is P500,000. The creditorhas
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 fron
Debt Restructuring
27-12 Debt Restructuring
nual
P6,000,000
Jpterm note
the end of 2020, Sarangani had started to experience extreme financial
A
and is in default in meeting interest payment on its long-term note.
This had continued until 2021. The company did not accrue the interest for
2021, The interest rate is 10% payable every December 31.
the
1n an agreement with the creditor, Sarangani Corporation obtained
flowing changes in the terms of the note.
. Theaccrued interest is forgiven.
+ The principal obligation will be due on December 31,2026.
+ Thenew interest rate is 8%
Whatis the gain on debt restructuring to be recognized by Sarangani?
a
b.
P2579,180
P1,600,000
c. P455,016
d. Nil
December 31, 2021. The present value of 1 at 10% for three periods is 0.75 ad
present value of an ordinary annuity of 1 at 10% for three periods is 2.49.
CCOMPREHENSIVE PROBLEMS
NOTES PAYABLE
Questions:
PROBLEM 27-13 Interest-Bearing Note - Lump Sum
Based on the above data, answer the following:
1.
What is the gain on extinguishment of debt to be recognized by Koronadd
Company on December 31, 20217
a.
P2,000,000
c
b. $1,203200
of note s 10%.
December31, The prevailing interest rate for this type
P1,703,200
d. P540,000
2. What is the interest expense to be recognized by Koronadal Compary
the year 20227
a.
b.
P303,680
P379,680
On December 31, Sultan Kudarat Company shows the following
data with
respect to its matured obligation.
Note payable
500,000
it
The company is threatened with the court suit f it could not paY I Pl
debt. Accordingly, the company enters into an agreement with the €™
agreement provides for the issue of 50,000 ordinary shares with !fl:ht
#50. The ordinary share is currently quoted at P70. How much I8 ',
premium arising from the debt restructuring considered as “equity s*?
93,000,000
£1,500,000
c. 2,000,000
d. P1,000,000
1155
2
<. $4,000,000
tb P783973
$3796,160
d. P4,633973
How much s the interest expense for 20217
232308
P434711
How mych ;
s the carryij B MO
L Moggogy
c. P463397
d. P600,000
.
unt of the note on Decem! ber 31,20217
O
" M4347,107
“rye
the issuance of share capital in full settlement of the note pay’,,;llfl“
a.
b.
Esed on the above data, answer the following: (Carry all decimal515places in
i
$5,000,000
Accrued interest payable
Questions;
the present value)
$"0utingfo
‘oW much is the cost of the machinery acquired on january 1,20
c. P320,000
d. P400,000
PROBLEM 27-11 Debt Restructuring
Onanuary 1, 2021, Davao Company bought a machine from Tagum Co. In lieu
d ash payment, Davao gave Tagum a 4-year, 4,000,000, 15% note payable.
pal is due on December 31, 2023 but interest is due annually every
o
)
497,370
d. P4,578,468
uch s the current portion of the note on December
¢ P150263
5' Nl
4 4497370
x
©. P150263
31,20217
31,202
:""""lth is the noncurrent portion of the note o1 December
¥11077
1
d. P4,497370
1156
(%] CamScanner
Restructuring
crapter 27 -Financlal Liabilitles and Debt
Jiowmuch is the interest expense for 20217
Chapter 27 -Financial Liabllities and Debt Restructuring
PROBLEM 27-14 Interest-Bearing Note - Non-Uniform Installments
B
On January 1, 2021, Davao Co. acquired a machine from Digos Co, In ey of
payment,
Davao gave Digos a 3-year, 3%, 2,000,000
Intcrcs:-bennn! e
payable. The interest is payable every December 31 while the principal Shi;llnbg
payable as follows:
December 31, 2021
December 31, 2022
December 31, 2023
b.
" 2 P3,000,000
c. 3,400,000
P3,256574
d. P4,578468
4 How much is the current portion of the note on December 31, 20217
a
How much is the cost of the machinery acquired on January 1, 20217
a. Nil
c 2,301,317
2.
P101,317
PROBLEM 27-16 Noninterest-Bearing Note - With Cash Price Equivalent
d. P1,756,328
OnJanuary 1, 2021, Mati Co. acquired inventory with a list price of 1,300,000
ada cash price of P994,760 by issuing P1,200,000, noninterest-bearing note
How much is the interest expense for 20217
a.
b.
Nil
P203842
pyable. Principal is due in three equal payments every December 31 beginning
c. 79,983
d. P210,759
un_l)mmb" 31, 2021. The effective rate of interest interpolated for the cash
price s 10%.
3. How much s the carrying amount of the note on December31, 20217
a P666525
c. P707,088
b. P684,283
d. p331,572
4. How much is the current portion of the note on December 31, 20217
a. P400,000
c. 339,149
b $320,017
d. P346,508
5.
Questions:
Eased on the above data, answer the following:
L Howmuch s the carrying amount of the note on inital recognition?
a Nil
c. P994,760
b 205,240
d. $1,300,000
How much is the noncurrent portion of the note on December 31, 20217
a.
b.
P400,000
320,017
4
c. P367,938
d. P346,508
PROBLEM 27-15 Interest-Bearing Note ~Uniform Installments
el
L Howmuch s the interest expense for 20217
1. How much s the cost of the machinery acquired on January 1+ 20217
c. P4,415,067
d. P4,633973
a. $3,783973
b. $4,000,000
1157
: 694,236
. Nil
d. P363,660
:'Bwnmuch isthe current portion of the note on December 31,2021
b '“
] "
.
Questions:
Based on the above data, answer the following: (Carry all deci™ ol pocs”
c. P69424
d. P36340
" P800,000
note. Principal is due in equal payments starting December 31, 20211
also payable every December 31.
The prevailing rate of interest for this type of note is 10%.
v oz
- P400,000
3 How much is the carrying amount of the note on December31, 20217
On January 1, 2021, Davao Co. acquired machinery from Mali? Co. ]nbe:rinl
cash payment, Davao gave Malita a 4-year, 15% P4,000,000, mteresz-m'sl
computing for the present value)
d. P2,132,231
5. Howmuch is the noncurrent portion of the note on December 31, 20217
a Nil
c P1,124343
b P124,343
d. P2,132231
Questions:
Based on the above data, answer the following:
b.
¢ P1,124,343
Nl
b P124343
The prevailing rate of interest for this type of note is 12%
1.
c. P463,397
d. P600,000
3 Howmuch is the carrying amount of the note on December31, 20217
b
£1,200,000
400,000
400,000
paan 711
441,507
,
c. P363,660
330,576
d. P33,083
!
a‘uwN,!'“‘h is the noncurrent portion of the note on December
e
31,2021 2
c. P363,660
330,576
d. P33,083
Rop,
1o
o M27.17 ninterest-Bearing
N
Note - Lump Sum
Co. In
nf:u of zsi 2021, Cotabato Co. acquired a machine l);mr; l;:idapawan
anrv 1200000,
ey
PA/ment, Cotabato gave Kidapawan & P80, e ging
intgry, e 2INg +Note payable due on December
Stlor this type of note is 12%-
31:
1158
(%] CamScanner
Chapter 27 -Financial Liabilities and Debt Restructuring
o
¢ 27 -Financial Liabilities and Debt Restructuring
PROBLEM 27-19 Issuance, Retirement and Conversion of Non-Convertible
gonds
§
Questions:
Based on the above data, answer the following:
1 How much is the cost of the machinery acquired on January 1, 20217
a. Nil
¢ P14,160
b. P854,160
d. P150,000
2
‘sary 1,2019, Dumaguete Co, issued its, 3,000, 1,000, 1256,
:"”,"m.‘g rate of interest of the bonds of 9%, Ineret is pay-ple
ever
December
a.
b.
Nil
P102,499
c P114,799
d. P400,000
How much is the carrying amount of the note on December 31, 20217
a.
P956,659
c. P1,071,458
b.
P1,200,000
d. P800,000
0a December 31, 2021, after payment of interest, the remaining bonds were
converted into P40 par value, 5,000 ordinary shares when the fair value of the
securitiesis P460. The bonds were converted because of the equity swap.
How much is the current portion of the note on December 31, 20217
a.
P114,799
c
b.
Nil
d. P956,659
Questions:
Based on the above data, answer the following: (Carry all decimal places in
P1,071,458
mputing
for the present value)
How much is the noncurrent portion of the note on December 31,20217
a. P956,659
c P1,071,458
b. P114,799
d. Nil
L lIssue price of the bonds on January 1,2019.
2
b.
In lieu of cash payment, Compostela gave Nabunturan a 3-year, £1,2200000
noninterest-bearing note payable. Principal is due in equal payments "';"
December 31 beginning on December 31, 2021. The prevailing interest rat¢
this type of note is12%.
Questions:
Based on the above data, answer the following:
How much is the cost of the machinery acquired on January 1,20212
a. Nil
c. P39,280
b. P110,720
d. P960,720
3
c P81,121
d. P42,873
How much is the carrying amount of the note on December 31 20
a.
b.
P676,006
P800,000
c Nil
d. P357,127
Nil
P318879
c. 357,127
d. p38,248
3
How much is the noncurrent portion of the note on December
a. Nil
c. P357,127
b. P318,879
d. P38248
1159
c. P167,030
b P145.252
d. P334,060
bonds on December 31, 2021.
gain (or loss) on the conversion of <.the 310,000
% The
gain
il
d. $720,839 loss
b $750,000 gain
¥ The net increase (or decrease) in the share premium as 3 result of the
:’"";i'l!lon of the bonds on December 31, 2021.
b
?
"
How much is the current portion of the note on December 31: 2021t
a.
b.
d. P176,050 gain
% Theinterest expense in 2021
2 $290,503
2
21
¢ P440336loss
b P286,092 loss
How much is the interest expense for 20217
P115.286
P400,000
c. P2,649,932
d. P2,675,570
a Nl
On January 1, 2021, Compostela Co. acquired machinery from szunmnn[fl‘
a.
b.
3,000,000
13,350,068
2 The gain or loss on the retirement of the bonds on December
31, 2020.
PROBLEM 27-18 Noninterest-Bearing Note - Installments
1
31
% of the bonds were retired
0n December 31, 2020, after payment of interest,
91,900,000 when the fair value of the securities is P450. The prevailing rate
ofinterest of the bonds is 11%.
How much is the interest expense for 2021?
Zofl?
. P315,000
$500,000
d. $2,100,000
Bonds
rtibele B,
ment and Conversion of ?-m:r0
ire
Ret
ce,
uan
Iss
0
(
20
27a"
S¥5
]Y hflL:
n Co. issued {5 10%
Cangpgal? 1, 2020, theTagfacebilara
amount of P3.000.000 'n-e{ Z
t gy bonds for shares at a conversion price ©!
s PAT ordinary of the bonds without the conversiot option is 12%.
iy T3 of interest
N
Payable every December 31.
cescigel
BN o%er 31, 2021, after payment of interest, ¥is of 1 P0 E’r:“:d:r‘:m,,,,s i
value of the securities
00 When
Uitterggr Ofthe
bongethe 1 fair
oHonp 'Y 1. 2022, stg induce the holder to convert t8 convertible debenture
benture is
" Tagbilaran l'!:u::: v.h: cuanversioll price o $400 ifthe deber
1160
(%] CamScanner
ter 27
Financial Liabilities and Debt Restructuring
s the: interest expense in 2020?
Chapter 27 -Financial Liabilities and Debt Restructuring
3
converted before March 1, 2022 (i.e, within 60 days). All the 1 0nd o
accepted the offer on January 1, 2022. On the date of conversion, the fajr
of the Tagbilaran Co.'s ordinary share is P420 per share.
2 whati
Valye
Questions:
Based on the above data, answer the following: (Carry all decimal places
"
computing for the present value)
1. Theamountallocated to equity component on January 1, 2020,
a.
b.
2.
3.
Nil
P216,287
c. P360,600
d. P227,447
Nil
c
b.
P110,024
d. P272,055
d. P1,778
b p23
\Whatis the interest expense
in 20217
c P1,749
d. P1,778
% a2 P1,500
b PL723
4 Whatis the interest expense in 20227
" a P2400
c P2,597
P2,554
d. P2,623
5. Whatis the carrying amount of the debentures on December 30, 20227
c. P19,728
a 19,400
d. P19,925
b P19,554
P162,031
The net increase (or decrease) in equity as a result of the retirement of the
bonds on December 31, 2021,
a.
b.
PROBLEM 27-22
Nil
P110,024 increase
You were able to obtain the following from the accountant of Tuguegarao
Company related to the company’s liabilities as of December 31, 2021:
c. P62,031 decrease
d. P72,055 decrease
4. The interest expense in 2021
5.
<. P1,749
p1500
b
The loss on the retirement of the bonds on December 31, 2021.
a.
b
Current liabilities:
a.
P159,510
c. P319,019
Aecounts payable
b.
P169,066
d. P338,131
19%note payable issued October 1, 2020, maturing
September 30, 2022
The amount to be recognized in profit or loss as a result of the amendment
Nil
c. P315,000
b.
P500,000
d.
1,250,000
3,000,000
16%note payable issued April 1, 2019, due on April 2022
of the terms on January 1, 2022.
a.
P1,350,000
Interest payable
Noncurrent liablity:
2,100,000
Wh2year, note payable issued on July 1, 2021
PROBLEM 27-21 Redeemable Preference Shares and Debentures
Roxas Company issued 15,000, P1, 10% redeemable preference shares !
January 1, 2019, The shares are subject to compulsory redemption b
company on December 31, 2021, The effective interest rate on the d‘;"m
G
Telollowing additional information pertains to these liabilltes:
Theaccounts payable balance of P1,350,g:000 was before
“Madjustments relating to the followin
2,000,000
any necessary year-
a vendor on December 31,
Goods were in transit to Tuguegarao from
FOB
2021, The invoice cost was P75,000. The goods were shipped
on January 2,
issuance is 11.4890%. On December 31, 2021, the directors resolved t0®
;‘a‘;’;*ng point on December 29, 2021 and were received
the preference shares at a premium of P.05 per share, This was in ¢
with the terms of the original issue.
?
e
Goods
In order to_obtain funds for the redemption, the company issued
ot of 0%
3
N
a vendor
P
shipped FOB
destination on December 21, 2021, from
unsecured, P1, 12% debentures on December 30, 2021 at a discou! d pentures
The invol ce cost was
i d on January 6,2022.
0 Tuguey‘8-'"?0, were receive
6,
,37'5[]0
were issued at an effective interest rate of 13.1640%.
27,2021, Tuguegarao wrote and recorded
On
P60,0Decemper
be redeemed on December 30, 2026 at a premium of 2%. These
Questions:
Based on the above and the result of your audit, you
el
the ans"e®
¢ value)
to the following;: (Carry all decimal places in computingareforto theprovide
prese"
1.
) The
checks totaling
/000 Which were mailed on January 10, 2022-
9 0y pI'eTeSt
of the 145 note payable is payable every September
30.
ecey
ce the P3,000,000
Tote |, Mber 31, 2021, the company expects ‘“y‘;‘bfilzaa lump sum. The
Whatis the interest expense in 20197
a.
P1500
¢ P1,749
b.
P1,723
d.
P1,778
oy
i ‘;Vfls refinanced by issuance of a long-term o
Payable every April 1.
1161
1162
(%] CamScanner
Chapter 27 -Financial Liabilities and Debt Restructuring
@aawfl -Financial Liabilities and Debt Restructuring
d) The note payable of $2,000,000 is payable to Baggao Corporg
interest is payable quarterly. The existing loan agreement does n::: Te
021
600,000
Iuly,,tgzr 1,2021
300,000
provision to refinance. During September, Tuguegarao was experiorl? | ogry1,2022
1200000
Company
agreed at the reporting date to provide a B! grace Pperiod
perj endingo
p
1,000,000
least twelve months to rectify the breach.
Questions: 3
Based on the above, answer the following:
1.
300,000
financil difficulty and was unable (o pay the periodic interess gyt | 11 2022-March 31,2023
P 1 20: 2023-March 31, 2024
Aprill,
ol 2024-March 31,2023
pprlL, 2023-March 31, 2024
p
¥
ppril1,
2024-March
31, 2025
1,400,000
800,000
10000
SZontot
In Tuguegarao's December 31, 2021 statement of financial position,by | "™
much should be the accounts payable?
Estimated Warranties
a.
P1,410,000
c P1462,500
b.
$1,425,000
4
d.
P480}000
Cd.
P1,485,000
#: Tonlinterest epense for the year 2021 N——
;'
5
i
:
7755’000
4
3. T°";;"4‘;"7‘55;
payable as of December 31, 25”2317'; .
:.
2.3 o
c
. P2,423,750
P503,
d. £2,380,750
4. Total current liabilities as of December31, 2021 is
P5158,750
c.d. P3,238,750
b,a. 2878750
$5115,000
5. Total noncurrent liabilities as of December 31, 2021 is
a. 3,000,000
¢ 5,000,000
b.
$2,000,000
P
d. Nil
7-]
Paraalb, b oo grfi‘dfl:; qualiy children's apparel for more 8% |
years. The company's fiscal year runs from April 1 to March 31, The follo¥
Paracelis has a one-year product warranty on some selected items in its product
line. The estimated warranty liability on sales made during the 2019-2020 fiscal
year and still outstanding as of March 31, 2020 amounted to P180,000. The
vamanty costs on sales made from April 1, 2020, through March 31, 2021, were
estimated at P520,000. The actual warranty costs incurred during 2020-2021
fsalyearare as follows:
Warranty claims honored on 2019-2020 sales
$180,000
Warranty claims honored on 2020-2021 sales
178,000
Toal warranty claims honored
P358,000
Otber information:
) Trade Payabl
li goods,ds, and_ services
ayables. Accounts payable for supplies,
purchaseson open account amount to 740,000as of March 31, 2021.
Y Sales Commissions Payable:
ts outside outside salespersons
yable: Paracelisi pays
pays iits
salesperso fixed
monthly salaries and commissions on net sales. Sales commissions are
n;m.;uud and paid on a monthly basis (in the month following m,:.mfnm
otsale), and the fixed salaries areA treated as advances against commissions.
i
WU, I the fixed salaries for slespersons exeed their sales
information relates to the obligations of Paracelisas of March 31, 2021:
{immissions
back to
em.
i earned for the month, such excess is not chargedlespersons
i Ee,[;":',:“‘ data for the month of March 2021 fo the 3 slesp
g:;::lll’sfli,:szl:d $10,000,000 of 10% bonds on July 1, 2019, The Previlt
Slespersons
Fixed salary
NetSales
Comimlsean e
will mature on July 1, 2029 Interest s paid semi-annually on July 137,
5
14,000
400,000
6%
market rate of interest for these bonds was 12% on the date of issue- d;an m
a
1. Paracelis uses the effective interest rate method to amortiz [l g
premium or discount. (Round present value factors to the nearest
places)
Notes payable
cutons™
Paracelis has signed several long-term notes with financial inst®5e/ o
maturities of these notes are given below. The total unpaid inte
these notes amounts to P600,000 on March 31, 2021.
Amount Due
Due date
April1,2021
P 400,000
1163
Totals
Yy
£10,000
18000
200,000
600000
%
w
d::\': *0ds. On March 15, 2021, Paracelis board of directors decl“r:?vlad:::
oy g °F P:20 per ordinary share and a 10% oemen ahe cleie,
Sargpacs were to be distributed on April 12,80
13 0 oy
gyt Of Fecord at the close of business on March 31
Py - 2racelis common stockare as fllows:
p 5 per share
Alue
UMbt of hares issued and outstanding
6000000 shares
1164
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27 _Financial Liabilities and Debt Restructuring
Chapter 27 -Financial Liabilities and Debt Restructuring
Market values of the ordinary shares:
March 15,2021
March 31,2021
April 12,2021
[
o market value on the date of purchase was P35 per share. One
n Company is in a position to exercise significant infl
:,'\:fiou the financial and operational policies of GL. i
s
In
P 22 per share
21.50 per share
22,50 per share
The summarized statement of financial position of GL on June 30,2021 was
asfollows:
share capital (P 10 each)
Retained earnings
Questions:
Based on the foregoing and the result of your audit, answer the following;
1. Proceeds from sale of bonds on July 1,2019.
a.
b.
2.
8,852,960
P10,000,000
NetAssets
c. 10,500,000
d. P10,467,040
P2,280,000
P1,600,000
OnJune 30, 2021, Costs incurred for development and promotion of a brand
c. P1,300,000
d. P3,800,000
are enumerated below:
1. Research on size of potential market
2. Products designing
3. Estimated warranties payable, March 31, 2021.
a.
P342,000
c. £520,000
b.
P18,000
d.
3. Labor costs in refinement of products
4. Development
P180,000
product design
4. Warranty expense for the year
5.
a.
P230,000
c. P520,000
b.
P168,000
d. P358,000
6.
7.
P70,000
P68,000
P4,732,000
c. P5,286,000
P4,760,000
d. P5,642,000
P14,389,350
P14,352,217
c P14,370,783
d. P14,252,960
°
PROBLEM 27-24 Financial Liabilities, Investment in Associate @ nd Resear®
and Development Cost
The following transactions were entered into by One Direction Company:
OnJuly 1,2020, 2 million convertible debentures of P100 each we;ew
*
Each debenture is convertible into 25 ordinary shares of P10 eac!
the
950,000
11,000,000
18,000,000
600,000
3,400,000
The ability to measure reliably the expenditure attributable to the
Intangible asset during its development.
Qestiong,
Bedon
L
¢ above data, determine the following:
:]w mount allocated to equity, net of issue cost, on July 1, 2020 (rounded
30, 2023. Interest is payable annually in arrears @ 8% per annu™
;
date of issue, market interest rate for similar debt with "";.N;: oftt
option was 11% per annum. However, on account of expenc’ i incre
&
cost, on July 1, 2020
maunt
g o aljq Oc3ted to financial liabili{lity,ty, n net of issue
(ounge
million, incurred on issuance of shares, the effective interest rat¢"
*
finalize
© That the intangible asset will generate probable future economic
benefits,
° The availability of adequate technical, financial, and other resources to
Complete the development and to use or sell it.
Noncurrent liabilities, March 31,2021.
a.
b.
|
to
P800,000
1,500,000
Assume that the company can demonstrate all the following:
© The technical feasibility of completing the intangible asset so that it will
beavailable for use or sale.
o The intention to complete the intangible asset and use or sellit.
© The ability to use or sell the intangible asset.
Current liabilities, March 31, 2021.
a.
undertaken
6. Staff training costs
7. Advertisement costs
c. P28,000
d. P26,000
b.
work
5. Costof upgrading the machine
Sales commission's payable on March 31, 2021.
a.
b.
P380,000,000
Recoverable amount of GL's net assets on June 30, 2021 was P370 million.
The current portion of Paracelis’ notes payable at March 31, 2021,
a.
b.
£100,000,000
$280,000,000
to 11.81%.
On July 1, 2020, One Direction Company acquired 20% sha™®s7 f Go%st
gzs)
Limited (GL), a listed company, when GL’s retained earnings 5
ot
million and the fair value of its net assets was P350 milll::ctllr:: Eom?’"’
consideration was two million ordinary shares of One Di
1165
Nil
*14.000,000
c. 14,370,000
d. P14,660,000
. 118500000
(3 185,340,000
1, In| BL630000
d.$200,000,000
a eNu! “XPense for the year ended June 30, 2021
3 16,000,009
¢. $22,000,000
3 21450000
1166
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Chapter 27 -Financial Liabilities and Debt Restructuring
oupter 2L —Financial Liabilities and Debt Res!rucluring
4.
b 1 (140,000)
5.
a.
Nil
b.
P1,000,000
¢
P2,000,000
¢ P13,450,000
d. 18,000,000
Nil
P4,800,000
intangible asset as of June 30, 2021 is
Nil
c. P13,450,000
b.
P4,800,000
d. P18,000,000
PROBLEM 27-25 Financial Liability at FVTPL vs. FLAC
On January 1, 2020, TimSpurs Co. issued 4-year bond with a face value of
P2,000,000 and stated interest of 8%, payable annually every December 31.The
company received P1,898,205 and incurred P25,000 of transaction cost. The
quoted price of the bonds is as follows:
December 31, 2020
102
December 31, 2021
December
31, 2022
98
99
(seNo.2: Assuming the bonds is classified as financial liability at amortized
:fiNaw much is the initial carrying amount of the bonds on January 1, 20207
Case No. 1: Assuming the bonds is classified as financial liability at fair vale
through profit or loss
1. How much is the initial carrying amount of the bonds on January 1, 2020
3.
4.
5.
P1,960,000
£1,923,205
c. P1,873,205
d. 1,898,205
How much is the interest expense for 20207
a. P160,000
c. P190,053
b. P187,321
d. P27,321
How much is the unrealized gain or loss in 20207
a.
b.
P129421loss
P139,474 loss
c. P141,795 loss
d. P129,421 gain
How much is the carrying amount of the liability on December 31 20217
a.
P1,930579
b.
P1,923,205
d. P1,898,205
4 Whatis the effective interest rate for the bond?
2 8%
c 9%
b
d
10%
11%
5, Howmuch is the interest expense for 20207
2.
b
P160,000
P187,321
¢ P190,053
d. p27,321
10. How much is the unrealized gain or loss in 20207
a. P129,421loss
c. P141,795loss
b P139,474 loss
d. Nil
12 How much is the gain (loss) on derecognition?
Based on the above data, answer the following:
2.
c P1873,205
b, 1,923,205
11 How much is the carrying amount of the liability on December 31, 20217
. P1930,579
c. 1,960,000
b $1923,205
d. P1,963,636
The bonds were retired on January 1, 2023 at 105 and incurred a transaction
cost of 20,000.
a.
b.
d. (P116,364)
"4 11,960,000
The costs incurred for development and promotion to be recognized g5
a.
<. (P100,000)
§ (p156364)
d. P4,290,000
The costs incurred for development and promotion to be recogy ized 3
expense as of June 30, 2021 is
a.
b.
6.
much is the gain (loss) on derecognition?
Impairment loss on June 30, 2021
c. P1,960,000
d. P1,963,636
How much is the unrealized gain or loss in 20227
a. P20,000 gain
c. P16,364 gain
b. P16,364loss
d. P20,000 loss
1167
;
3 (P120,000)
c. (P100,000)
b (P156,364)
d. (P116,364)
est and Nonnancing of Loan, Notes Payable Inter
27-26
m:f“Beari
ng Refi
neomnection jep your audit of Riley Corporation’s financial statements for the
33221 You noted the following liability account balances asof December 31,
1;
l;: Yotes payapye
$2,800,000
s payable
2,000,000
,:’:’::7‘:?; during 2021 and other Information relating to Riley’s liabilities
P
)
e 1,
i
2% note is dated May
e in four equal annual
1, 2020 and is payabl The first principal and
May 1, 2021,
" :T:l‘,',',':"“‘s of P700,000 l::'gifimngay 1,20
21. re on uly 1, 2022 inerst on
ooen::.d;auy';mg}:mn matu
The 1000%, rz.oRtoo,ower
) fhh:l
00 Decemh(eru,fimméei
and December t31. with
oan is due every aJulyrefi1 nanc
a bank o relance
emen
agre
ing
oy Y €ntered into
nancing and roll over tr3
“’"\p?: 2 long:term basis, The refi
ted on December 31, 2021.
1168
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Chapter 27 -Financial Liabilities and Debt Restructuring
c)
chap!
OnJanuary 1, 2021, The Company purchased delivery equij Pment by ;.
cash
of P200,000
and
issuing a noninterest-bearing
note
2,000,000 due in 4 equal annual installments starting Dec,mhe‘:“z";“;flr
The prevailing rate of interest of this type of note is 12%.
Based on the above data, determine the following:
1. How much is the carrying amount of the note issued for fle]iveryeq“ipm"“
2.
c. P4,400,000.
b.
P4,244,995
d. P3,627,987.
4.
a
b.
c. P988,974.
d. P763,573
Nil
P168,000
P268,000
c. P662,238
P618,238
d. P352,327.
c. P143,000
d. P215,000
liabilities as of December 31, 2021 is
Total interest expense for the year 2021
b.
P155,000
P203,000
2 The portion of the Note Payable - bank to be reported under current
c. P224,000
d. 200,000
a.
principal and interest is payable annually on April 30. A payment of
220,000 is due April 30, 2022. The payment includes interest of 180,000.
Based on the above and the result of your audit, answer the following:
1 Interest payable as of December 31, 2021 is
Accrued interest payable as of December 31, 2021
a.
b.
5.
P1,100,000
P1,055,893
The 129 mortgage note was issued May 1, 2011, with a term of 20 years.
Questions:
3. Current portion of notes payable as of December 31, 2021
a.
b.
entif the company fails to make a monthly interest payment within 10
Fiysofthe date the payment is due. As of December 31, 2021. Rook s three
yable semi-annually every June 30 and December31.
Noncurrent portion of the notes payable as of December 31, 2021
P5,600,000
), with a term of
1 A erms of the note give the holder the right to demand immoiare
The bonds payable is 10-year, 8% bonds, issued June 30, 2012. Interest is
c. P1,271,000
d. $2,200,000
a.
10% mortgage note was issued October 1, 20;
months pehind in paying its re_quxred interest payment.
Questions:
on initial recognition
a. P1518,650
b. 2,000,000
ter 27, _Financial Liabilities and Debt Restructuring
PROBLEM 27-27 Current vs. Noncurrent Liabilities
You were able to obtain the following from the accountant for Ro ok Corp
a 300,000
c. P500,000
b. 800,000
d. Nil
& Total current liabilities as of December31, 2021 is
2 3,950,000
c. P4,138,000
b. #3938,000
d. $3,998,000
4 Total noncurrent
liabilities as of December31, 2021is
. P1760,000
c. 2,560,000
b. P3960,000
d. P1,960,000
related to the company’s liabilities as of December 31, 2021
Accounts payable
P 650,000
Notes payable - trade
Notes payable - bank
190,000
800,000
Wages and salaries payable
15,000
Interest payable
Mortgage notes payable - 10%
600,000
Mortgage notes payable - 12%
Bonds payable
1,500,000
2,000,000
?
The following additional information pertains to these liabilities.
date
a. Alltrade notes payable are due within six months of the reportité Bark.
b. Bank notes-payable include two separate notes payable to Alled -Btkoy
(1) A P300,000, 8% note issued March 1, 2019, payable ©
Interest is payable every six months.
n nzufl;”:
(2) A T-year, PS00,000, 11 %9% note issued January 2 20210F
30, 2021, Pawn negotiated a written agreement With
o
replace the note with a 2-year, PS00,000, 10% "D"Z 21
pe i
January 2, 2022, The Interest was paid on December31
1169
1170
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