Debt Restructuring Problem 1 (Asset Swap/Dacion en Pago)

DEBT RESTRUCTURING
Problem 1 (Asset Swap/Dacion En Pago)

In December 31, 2022, KDC Company is in financial trouble, and could not meet the principal and
interest payment on its bank loan of P5,000,000. The loan, which was entered into in 2019, matures
in 5 years, and provides for 10% annual interest rate, payable every December 31. The company
was able to pay the interest for 2019 and 2020.
The entity and the bank agreed to on an arrangement where the land and building of KDC
Company will be given by the entity as full payment for the loan, including accrued interest.
The cost of the land is P1,500,000, and the building was constructed on January 1, 2019, at a cost
of P6,000,000, and has a useful life of 10 years, with estimated residual value of P500,000. The
fair value of the land and building combined is determined to be P5,900,000.
Required:
1. Compute the gain or loss on extinguishment of debt.
2. Prepare journal entry to record the extinguishment of debt.
Problem 2 (Equity Swap; One Class of Share)

Seve Company showed the following data with respect to a matured obligation:
Mortgage Payable 5,000,000

Accrued interest payable 500,000
The entity was threatened with a court suit if it could not pay its maturing debt. Accordingly, the
entity entered into an agreement with the creditor for the issuance of share capital in full settlement
of the mortgage payable.
The agreement provided for the issue of 35,000 shares with par value of P100 and current quoted
price at P130. The fair value of the liability was P4,700,000.
Required:
Prepare journal entry to record the equity swap on the books of Sunshine Company:
1. If the fair value of the share capital is used for the equity swap.
2. If the fair value of the liability is used for the equity swap.
3. If the carrying amount of the liability is used for the equity swap.
Problem 3 (Equity Swap; Two Classes of Share)

Rona Company was threatened with bankruptcy due to the inability to meet interest payments and
fund requirements to retire P5,000,000 note payable with accrued interest payable of P400,000.
The entity entered into an agreement with the creditor to exchange equity instruments for the
financial liability.
The terms of the exchange were 300,000 ordinary shares with P5 par value and P10 market value,
and 25,000 preference shares with P10 par value and P60 market value. The fair value of the
liability was P4,800,000.
Required:
Prepare journal entry on the books of Quest Company to record the settlement of the note payable:
1. If the fair value of the equity instrument is used.

2. If the fair value of the liability is used.
3. If the carrying amount of the financial liability is used.
Problem 4 (Modification of Terms; With Substantial Modification)

On January 1, 2021, Rona Company was experiencing extreme financial pressure and was in
default in meeting interest payment on a long term note of P6,000,000 due on December 31, 2021.
The interest rate is 12% payable every December 31. The accrued interest payable on January 1,
2021 is P720,000.
In an agreement with the creditor, the entity obtained the following changes in the terms of note:
a. The accrued interest on January 1, 2021 is forgiven.

b. The principal is reduced by P500,000.
c. The new interest rate is 8% payable every December 31.
d. The new date of maturity is December 31, 2024.
e. The prevailing market rate of interest is 10%.
f. The entity incurred arrangement fee of P100,000.
The present value of 1 at 12% for four periods is 0.64 and the present value of an ordinary annuity
of 1 at 12% for four periods is 3.04.
The PV of 1 at 10% for 4 periods is 0.68 and the PV of an ordinary annuity of 1 at 10% for 4
periods is 3.17.
Required:
Prepare all journal entries for 2021.
Problem 5 (Modification of Terms; Without Substantial Modification)

La Velle Company was indebted to the bank for P6,000,000 on January 1, 2021. The principal and
accrued interest of P600,000 were overdue. The interest on the note was 10%.
The entity negotiated with the bank for the restructuring of the obligation.
a. The principal obligation is not reduced.
b. The accrued interest of P600,000 is waived.
c. The new date of maturity is December 31, 2022.
d. The entity shall pay an annual interest of 12% every December 31.
The present value of 1 at 10% for two periods is 0.83 and the present value of an ordinary annuity
of 1 at 10% for two periods is 1.74.
The market rate of interest is 9%. The PV of 1 at 9% for two periods is 0.84, and the PV of an
ordinary annuity of 1 at 9% for two periods is 1.76.
Required:
Prepare journal entries for 2021.

Debt Restructuring Problem 1 (Asset Swap/Dacion en Pago)

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DEBT RESTRUCTURING

Problem 1 (Asset Swap/Dacion En Pago)

Problem 2 (Equity Swap; One Class of Share)

Mortgage Payable 5,000,000

Problem 3 (Equity Swap; Two Classes of Share)

1. If the fair value of the equity instrument is used.

Problem 4 (Modification of Terms; With Substantial Modification)

a. The accrued interest on January 1, 2021 is forgiven.

Problem 5 (Modification of Terms; Without Substantial Modification)

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