SAN CARLOS COLLEGE

COLLEGE OF ACCOUNTANCY
ACCOUNTING ENHANCEMENT
CHAPTER 8 ‒ NON CURRENT LIABILITIES

8.1 Bonds Payable

What is the initial measurement (initial carrying amount) of bonds payable? Alternative
Present value of the principal (P x PVF) X
Add: Present value of nominal interest (P x NR x PVF) X
Initial measurement of the bonds payable (note 1) Ans.

Note 1 – do not anymore deduct the transaction cost.

Note 2 – use the original effective rate in getting the PVF, use the “after adjustment for the
transaction cost”.
Note 3 – if the payment of interest is semi-annual, divide the ER by two and multiply the years
by two.

How much is the NET amount of cash receipt from issuance of bonds payable?
Issue price of the bonds payable X
Add: Accrued interest, (Principal x NR x months accrued) X
Less: Transaction cost (X)
Net cash receipt from issuance Ans.

What is the initial measurement of bonds payable?

Fair value of the bonds (also equal to theissue
“ price”) X
Less: Transaction cost (X)
Initial measurement of the bonds payable Ans.
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1) On March 1, 2019, Madine Corporation issued at 103 plus accrued interest, 1,000 of its 15%, P1,000 bonds. The bonds are
dated January 1, 2019 and mature on January 1, 2024. Interest is payable semi-annually on January 1 and July 1. Madine paid
transaction costs of P60,000. Based on the given information, how much would Madine realize as net cash receipts from the
bond issuance?
A. 995,000 B. 1,030,000 C. 1,055,000 D. 1,095,000

2) Bond issuance cost should be

A. Expensed in the period when the bond payable is issued.
B. Recorded as a reduction in the carrying amount of bond payable.
C. Accumulated in a deferred charge account and amortized over the life of the bond.
D. Reported as an expense in the period the bond matures or its retired.

3) If bonds are issued between interest dates, the entry of the issuing entity could include a
A. Debit in interest payable C. Credit to increased expense B. Credit to
interest receivable D. Credit to unearned interest

Use the following information for the next two (2) questions:
Ava Company issued 10-year bonds payable with face amount of P4,000,000 on January 1, 2023. The interest is payable annually
on December 31 at the 6% stated interest rate. The bonds were issued to yield 9%. The present value of 1 at 6% for 10 periods
is 0.56 and the present value of an ordinary annuity of 1 at 6% for 10 periods is 7.36. The present value of 1 at 9% for 10 periods
is 0.42 and the present value of an ordinary annuity of 1 at 9% for 10 periods is 6.42.

4) What is the market price of the bonds on January 1, 2023?

A. 1,680,000 B. 3,991,200 C. 3,220,800 D. 4,000,000

5) What is the bond interest expense for 2023?

A. 246,000 B. 360,000 C. 193,248 D. 289,872

6) What is the market arte of interest for a bond issue that sells for more than its face value?
A. Lower than the rate stated on the bond C. Higher than the rate stated on the bond B.
Equal to the rate stated on the bond D. Independent of the rate of the bond

7) Downing Company issues P5,000,000, 6%, 5-year bonds dated January 1, 2022 on January 1, 2022. The bonds pay interest
semiannually on June 30 and December 31. The bonds are issued to yield 5%. What are the proceeds form the bond issue?
(PVF 5 Decimal)
A. 6,531,618 B. 5,216,494 C. 5,218,809 D. 5,217,308

Use the following information for the next two (2) questions:
On January 1, 2016, Pharaoh Company issued 3-year bonds with a face value of P1,200,000 and stated interest of 8% per year.
The bonds mature in 3 equal annual installments every December 31. The interest is also payable every December 31. The bonds
acquired to yield 10%. The bonds were appropriately classified as financial liability at amortized cost.

8) How much is the issue price of bonds on January 1, 2016? (Complete decimal places)
A. 1,432,167 B. 1,158,926 C. 907,875 D. 896,042

9) How much is the interest expense for 2016?

A. 174,604 B. 143,212 C. 115,892 D. 107,934

10) On January 1, 2021, Mom Company received P1,032,880 for P1,000,000 face amount, 12% bonds, a price that yields 10%
interest is payable semi-annually every June 30 and December 31. Interest expense for the year ended December 31, 2021?
A. 123,946 B. 124,155 C. 103,288 D. 102,870

11) On January 1, 2016, Quilladin Company issued 5 year bonds with face value of P5,000,000 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 be initially measured, the bonds were determined to yield 6% per annum. On December
31, 2016, what should Quilladin report as carrying amount of the bonds payable?
A. 5,430,800 B. 5,345,200 C. 5,414,800 D. 5,000,000

12) Which of the following is incorrect about bonds sold at a discount?

A. The carrying amount of the bond increases each year
B. The discount on bonds payable account decreases each year
C. At maturity, the face value and carrying amount of the bonds will be equal D. The balance of the bonds payable account
increases each year

13) On January 1, 2017, Bontoc Company issued 5,000,000, 8% serial bonds to be repaid in the amount of P1,000,000 each year.
Interest is payable annually on December 31. The bonds were issued to yield 10% a year. The bond proceeds were P4,757,000
based on the present value at January 1, 2017 of five annual payments. The entity amortized the bond discount by the interest
method. On December 31, 2017, what is the carrying amount of the bonds payable?

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A. 4,832,700 B. 3,832,700 C. 4,805,600 D. 3,805,600

14) On December 31, 2019, the liability section of Phillies Company’s statement of financial position included bonds payable of P10
million and unamortized premium on bonds payable of P180,000. Further verification revealed that these bonds were issued
on December 31, 2017 and will become due on December 31, 2027. Interest at 12% is payable every June 30 and December
31. On April 1, 2020, Phillies retired P4,000,000 of these bonds at 97 plus accrued interest. How much was the total amount
of cash paid for the retirement of bonds on April 1, 2020?
A. 3,950,000 B. 4,000,000 C. 4,040,000 D. 4,180,000

15) The 12% bonds payable of Nyman Company had a carrying amount of P832,000 on December 31, 2021. The bonds, which
had a face value of P800,000, were issued at a premium to yield 10%. Nyman uses the effective-interest method of
amortization. Interest is paid on June 30 and December 31. On June 30, 2022, several years before their maturity, Nyman
retired the bonds at 104 plus accrued interest. The loss on retirement is:
A. 0 B. 6,400 C. 9,920 D. 32,000

16) On December 31, 2015, Affenpinscher Corporation issued 20-year, noncovertible bonds of P5,000,000 for P5,851,160 to yield
10%. Interest is payable annually on December 31 at 12%. On June 1, 2018, Affenpinscher retires 3,000 of its own P1,000
bonds. Total cash paid by Affenpinscher is P3,120,000. The accounting period of Affenpinscher is the calendar year. What is
the amount of gain or loss on early retirement of bond that will be reported in 2018 income statement?
A. 617,440 B. 517,440 C. 514,740 D. 367,440

17) Nami, Inc., issued 2,000 of its 5 year P1,000 face value 11% bonds on January 1, 2018. These bonds were sold for P2,155,800
a price that yields 9%. The bonds were dated January 1, 2018 and pay interest annually every December 31. On July 1, 2020,
1,000 of the bonds were retired, the company paying P1,100,000 inclusive of accrued interest.
What amount of gain or (loss) on retirement of bonds payable during 2020?
A. 1,963 loss B. 56,963 loss C. 5,753 loss D. 1,963 gain

18) On December 31, 2015, Ariana Grande Corporation issued 20-year, nonconvertible bonds of P5,000,000 for P5,851,160 to
yield 10%. Interest is payable annually on December 31 at 12%. On April 1, 2017, Ariana Grande retires 2,000 of its own
P1,000 bonds at 102 plus accrued interest. The accounting period of Ariana Grande Corporation is the calendar year. What is
the amount of gain or loss on early retirement of bond that will be reported in 2017 income statement?
A. 292,873 gain B. 292,873 loss C. 232,873 loss D. 232,873 gain

19) Upon retirement of the bonds, any resulting gain on retirement of the bonds should be reported in income statement when
A. Retirement price is less than the carrying value of the bonds
B. Retirement price is greater than the carrying value of the bonds
C. Retirement price is equal to the carrying amount of the bonds
D. None of the above

20) On January 1, 2022, Marimar Company issued 10,000 of its 12%, P1,000 face value 5-year bonds at 105. Interest on the
bonds is payable annually every December 31. In connection with the sale of these bonds, Marimar paid the following expenses:

Promotion costs 100,000

Engraving and printing 400,000
Underwriter’s commissions 500,000

Using the straight line method, what amount should Marimar report as bond interest expense for the year 2022?
A. 1,100,000 B. 1,200,000 C. 1,300,000 D. 1,600,000

21) On January 1, 2019, Soul Inc. issued 1,000 of its 8%, P1,000 bonds at 96. Interest is payable semiannually on January 1 and
July 1. The bond mature on January 1, 2029. Soul paid 50,000 in bond issue costs. Soul uses straight line amortization. The
amount of interest expense for the year is:
A. 76,000 B. 71,000 C. 84,000 D. 89,000

22) On January 1, 2019, Pikipek Company issued 1,000 P4,000, 10% 3 year bonds for P3,807,852. Principal is due on December
31, 2021 but interests are due annually every year-end. The effective interest rate is 12%. Pekipek Co. incorrectly used the
straight line method instead of the effective interest method to amortize the discount. What is the effect of the error on the
carrying amount of the bonds on December 31, 2019?
A. 7,107 over B. 7,107 under C. 6,341 over D. 6,341 under

23) P1,000 bond’s carrying amount at the end of 2014 is P940, and P955 at the end of 2015. The bond pays interest annually at
December 31 and the straight line method is used to amortized bond discount and premium. The bond matures on December
31, 20__.
A. 16 B. 17 C. 18 D. 19

24) Sanji, Inc. issued P100,000 of its 8%, five year bonds on January 1, 2015, at 98. Interest is paid on January 1 and July 1. The
bonds are callable at 103 and straight line amortization is used. The bonds are recallable on April 1, 2017. The journal entry
to record the reacquisition of the bonds will include a:

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A. DR. Loss 5,500 B. CR. Gain 5,000 C. CR. Discount 1,100 D. DR. Loss
4,200

8.2 Compound Financial Instrument

Compound Financial Instrument ü Bonds issued with

the conversion option; or ü Bonds issued with
detachable share warrants

How much from the issue price is allocated to the bonds and equity component?
Total issue price X Less: Fair value of the bonds (note 1) (X)
Issue price allocated to the equity component (the residual) Ans.

Note 1 ü the fair value of the bonds issued without the conversion option; or
ü present value of the principal + present value of the nominal interest
(using the effective rate without the equity component)

Use the following information for the next two (2) questions:
On January 1, 2016, Dragonflame Company issued P5,000,000 of 12% nonconvertible bonds at 110 which are due on December
31, 2020. In addition, each P1,000 bond was issued with 30 detachable share warrants, each of which entitled the bondholder to
purchase for P50 one share of Drangonflame Company with par value of P25.

On January 1, 2016, the quoted market value of each warrant was P5. The market value of the bond ex-warrant at the time of
issuance is 98.

25) What is the carrying amount of the bonds payable at the time of issuance?
A. 5,500,000 B. 4,900,000 C. 5,000,000 D. 4,750,000

26) What amount should be recorded as share premium upon exercise of all of the share warrants?
A. 3,750,000 B. 4,350,000 C. 4,250,000 D. 4,500,000

Use the following information for the next two (2) questions:
On January 1, 2023, Rapido Company issued P30,000,000, 10% bonds at 104. The bonds are due on January 1, 2033. Each P1,000
bond was issued with 20 detachable share warrants, each of which entitled the bondholder to purchase one 40 par value share of
Rapido for P60.

Essence Company purchased 20% of the bond issue. The market values of the share and warrant are P58 and P8 respectively, and
the bonds are selling at 95 ex-warrant. On December 31, 2024, when Rapido’s share had a market price of P72 and the unamortized
bond discount was P1,000,000, Essence exercised the warrants it held.

27) What is the measurement of the bonds payable on January 1, 2023?

A. 31,200,000 B. 30,000,000 C. 28,500,000 D. 29,000,000

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28) The amount of share premium to be credited by Rapido when Essence exercised the share warrants is
A. 2,940,000 B. 3,840,000 C. 2,400,000 D. 3,360,000

29) How are the proceeds from issuing a compound instrument allocated between the liability and equity components?
A. First, the liability component is measured at fair value, and then the remainder of the proceeds is allocated to the equity
component.
B. The proceeds are allocated to the liability and equity based on relative fair value.
C. The proceeds are allocated to the liability and equity based on carrying amount. D. The proceeds are not allocated because
the compound instrument is accounted for either as liability or equity.

Use the following information for the next two (2) questions:
On January 1, 2021, Jumbo Corporation issued a P3,000,000 6% convertible bonds at par. The bonds are redeemable at a premium
of 10% on December 31, 2024 or it may be converted into ordinary shares on the basis of 50 shares for each P1,000 bond at the
option of the holder. The interest rate for an equivalent bond without the conversion rights would have been 10%.

Present value of 1 at 10% for 3 periods 0.6830

Present value of ordinary annuity of 1 at 10% for 3 periods 3.1699

30) The issuance of convertible bonds on January 1, 2021 increased the entity’s equity by
A. 0 B. 73,068 C. 175,518 D. 380,418

31) The carrying amount of the bonds payable as of December 31, 2021 is
A. 2,701,540 B. 2,926,930 C. 3,000,000 D. 3,039,625

Use the following information for the next three (3) questions:
On January 1, 2019, Dias Company issued 3-year, 4,000 convertible bonds at face value of P1,000 per bond. Interest is to be paid
annually in arrears at the stated coupon rate of 6%. Each bond is convertible, at the holder’s option, into 200 P2 par value ordinary
shares at any time up to maturity. On the date of issuance, the prevailing market interest rate for similar debt without the
conversion privilege was 9%. On the same date, the market price of one ordinary share was P3. The bonds were converted on
December 31, 2020.

Present value of 1 at 9% for 3 periods 0.7722

Present value of ordinary annuity of 1 at 9% for 3 periods 2.5313

32) The equity component of the convertible debt is

A. 303,688 B. 1,973,621 C. 1,600,000 D. 2,400,000

33) The interest expense to be reported on Dias Company’s income statement for the year ended December 31, 2020 is
A. 101,000 B. 110,107 C. 240,000 D. 341,008

34) Entry to record the bond conversion on December 31, 2020, should include a credit to share premium – issuance of
A. 2,289,893 B. 2,400,000 C. 2,593,676 D. 0

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 8.3 Notes Payable
Category Classification Fair value* Interest revenue Interest receivable Carrying amount Current portion Noncurrent portion
1 Interest bearing Face amount / Principal Nominal interest Nominal interest Remaining unpaid principal Principal amount that Principal amount that
/ face amount unpaid will be paid within 12 will be paid beyond 12
Unpaid principal months months.
or x nominal interest x #
of mos. from last original Note – you will separate
Unpaid principal interest payment up to principal the note into current and
FV of equipment – DP x nominal interest December 31 / 12 mo less : principal payment non current
interest revenue interest receivable unpaid principal only if it is a serial note
or note were the
principal is payable on
installment.

2 Non-interest Present value of the Effective interest None Amortized cost Carrying amount, end Carrying amount, end x
bearing principal less: noncurrent portion effective interest + 1
current portion less: any principal pay.
Carrying amount at beg forever zero Fair value / beg CA noncurrent portion
Principal x PVF x effective interest x effective interest + 1 less:
interest revenue any principal payment Note – it is easier if you Note – you will separate
use the effective interest in carrying amount at end compute first the the note into current and
getting the PVF noncurrent portion then non
the residual is the current only if it is a
or current portion serial note or note were
the principal is
FV of equipment – DP
payable on installment.
3 Interest bearing Present value of the principal Effective interest Nominal interest Amortized cost Carrying amount, end Carrying amount, end x
with unrealistic plus present value of less: noncurrent portion effective interest + 1
nominal interest nominal interest. current portion less: nominal interest
Carrying amount at beg Unpaid principal Fair value / beg CA less: any principal pay.
Principal x PVF x effective interest x nominal interest x # x effective interest + 1 Note – it is easier if you noncurrent portion
in case nominal is + interest revenue of mos. from last less: nominal interest compute first the
not equal to Principal x nominal x PVF interest payment up to less: any principal noncurrent portion then Note – separate only if
effective December 31 / 12 mo payment carrying amount the residual is the serial note or note on
or interest receivable at end current portion installment
FV of equipment – DP
Use the following information for the next three (3) questions:
On January 1, 2019, Rottweiler Company acquired transportation equipment by paying cash of P400,000 and issuing a noninterest-
bearing note payable of P4,000,000 due on January 1, 2022. There is no cash price equivalent for the equipment. The prevailing
rate of interest for this type of note is 12%. (PVF 5 Decimals)

35) How much is the carrying amount of the note on initial recognition?
A. 3,247,120 B. 2,847,120 C. 2,786,309 D. 2,000,000

36) How much is the interest expense in 2019?

A. 480,000 B. 389,654 C. 341,654 D. 335,357

37) How much is the carrying amount of the note on December 31, 2019?
A. 3,250,780 B. 3,188,776 C. 3,179,830 D. 2,505,464

Use the following information for the next five (5) questions:
On January 1, 2016, Scatter Co. acquired inventory with a list price of P1,300,000 and a cash price of P994,760 by issuing
P1,200,000, noninterest bearing note payable. Principal is due in three equal payments every December 31 beginning on December
31, 2016. The effective rate of interest interpolated for the cash price is 10%.

38) How much is the carrying amount of the note on initial recognition?
A. 1,300,000 B. 1,200,000 C. 994,760 D. 901,578

39) How much is the interest expense for 2016?

A. 130,000 B. 120,000 C. 99,476 D. 90,157

40) How much is the carrying amount of the note on December 31, 2016?
A. 800,000 B. 591,736 C. 694,236 D. 920,000

41) How much is the noncurrent portion of the note on December 31, 2016?
A. 400,000 B. 340,826 C. 363,660 D. 308,000

42) How much is the current portion of the note on December 31, 2016?
A. 400,000 B. 250,910 C. 330,576 D. 612,000

Use the following information for the next three (3) questions:
On January 1, 2019, Sulimov Company acquired machinery by issuing a 3-year, P4,800,000 noninterest-bearing note due in equal
semi-annual payment starting July 1, 2019. The prevailing rate of interest of this type of note is 10%. (PVF 5
Decimal)

43) How much is the carrying amount of the note on initial recognition?
A. 4,060,552 B. 4,000,000 C. 3,980,342 D. 3,786,309

44) How much is the interest in 2019?

A. 376,207 B. 350,780 C. 279,830 D. 203,028

45) How much is the carrying amount of the note on December 31, 2019?
A. 3,463,580 B. 3,343,341 C. 2,836,760 D. 2,279,830

Use the following information for the next three (3) questions:
On January 1, 2019, Damira Company acquired machinery by issuing a 3-year, 3%, P4,000,000 note payable. Principal is due on
January 1, 2022 but the interest are to be paid annually starting January 1, 2020. The prevailing interest rate for this type of note
is 12%. (PVF 5 Decimal)

46) How much is the carrying amount of the note on initial recognition?
A. 4,000,000 B. 3,247,120 C. 3,174,309 D. 3,135,340

47) How much is the interest expense in 2019?

A. 480,000 B. 376,241 C. 341,656 D. 334,357

48) How much is the carrying amount of the note on December 31, 2019?
A. 3,505,464 B. 3,401,832 C. 3,391,581 D. 3,288,776

Use the following information for the next three (3) questions:
On January 1, 2019, Sheepdog Company purchased inventory with a list price of P4,400,000 and a cash price of P4,000,000 by
issuing a noninterest-bearing note of P4,800,000 due on December 31, 2021?

49) How much is the carrying amount of the note on initial recognition?
A. 4,800,000 B. 4,400,000 C. 4,000,000 D. 3,786,309

50) How much is the interest expense in 2019?

A. 400,000 B. 279,830 C. 250,780 D. 150,780

51) How much is the carrying amount of the note on December 31, 2019?
A. 4,270,780 B. 4,250,780 C. 4,400,000 D. 4,000,000
 J. S. CAYETANO
52) On January 1, 2019, Crate Company acquired machinery by issuing a 3-year, 3%, P4,000,000 note payable. Principal is due
on January 1, 2022 but interest are to be paid on semi-annual basis starting July 1, 2019. The prevailing interest
rate for this type of note is 12%. How much is the carrying amount of the note on initial recognition? (PVF 5 Decimal)
A. 4,000,000 B. 3,174,309 C. 3,135,340 D. 3,114,884

53) On September 1, 2019, Tom company borrowed on a P1,650,000 note payable from ABN Bank. The note bears interest at 12%
and is payable in three equal annual payments of P550,000. On this date, the bank’s prime rate is 11%. The first annual
payment for interest and principal was made in September 1, 2020. At December 31, 2020, what amount should Tom company
report as accrued interest payable?
A. 66,000 B. 60,500 C. 44,000 D. 40,333

54) Tatiana Company issued a P5,000,000 note payable on April 1, 2018 bearing an interest rate of 12%, that is compounded
annually and is due on March 31, 2020. If the principal and the interest is payable on maturity date, what is the accrued interest
to be reported on Tatiana’s December 31, 2019 balance sheet?
A. 1,000,000 B. 1,104,000 C. 1,200,000 D. 1,272,000

55) On July 31, 2019, Joe Company issued a five-year note payable with face amount of P2,400,000 and an interest rate of 10%.
The term of the note requires Joe Company to make five equal annual payments of plus accrued interest, with the first payment
due on July 31, 2020. With respect to the note, the current liabilities section of Joe Company’s December 31, 2019 statement
of financial position should include
A. 480,000 B. 580,000 C. 620,000 D. 600,000

56) On January 1, 2020, AAA Co. borrowed 10%, P4,000,000 loan from BBB Bank. Principal is due on January 1, 2023 but interests
are due annually starting January 1, 2021. AAA was charged by the bank a 3% nonrefundable loan origination fee representing
service fee. How much is the carrying amount of the loan on initial recognition?
A. 3,947,608 B. 3,880,000 C. 3,840,234 D. 3,720,000

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In “equity swap”, what is the gain or loss on extinguishment of debt and the related share premium, if any?
Priority Computation of gain or loss Computation of share premium
1. CA of total liability – Total FV of shares issued = gain (loss) FV of shares issued – Total Par value of shares
issued = SP
2. CA of total liability – FV of liability = gain (loss) FV of liability – Total Par value of shares issued = SP
3. CA of total liability – CA of total liability = gain (loss) CA of total liability – Total Par value of shares issued = SP

Under modification of term, what is the gain or loss on extinguishment?

Carrying amount of the notes or bonds payable at modification date X
Add: Accrued interest ( only if the company accrued the interest ) X Total carrying amount of
liability X Present value of expected cash flow:
Present value of new principal (NP x PVF ) X
+ Present value of new nominal interest, if any (NP x NNR x PVF ) X (X)
Gain or loss on extinguishment X
notes Note 1 – in getting the PVF always use the original ER.
Note 2 – if the gain or loss on extinguishment is below 10%, no gain or loss should be recognized.
Note 3 – under the new interpretation, even if the gain or loss is below 10% gain or loss should be recognized.

57) Sundown Company has bonds payable with face amount of P5,000,000 and a carrying amount of P5,150,000. In addition,
unpaid interest on the bonds has been accrued in the amount of P300,000. The creditor has agreed tot the settlement of the
bonds payable in exchange for land with fair value of P4,500,000. The land has a historical cost of P3,200,000. What amount
of pretax gain on extinguishment should Sundown Company report as component of income from continuing operations in
2017?
A. 2,250,000 B. 950,000 C. 2,100,000 D. 1,950,000

58) The Melaren Company is going through some financial problems in 2020. A group of creditors holding P1,000,000 of 14%
debenture bonds issued by Melaren agreed to accept 80,000 shares of P10 par common share in full payment of the obligation.
Interest equivalent to one year period is still outstanding. Melaren share has a market value of P12 per share in 2020. An
unamortized premium of P15,000 for the P1,000,000 bonds is outstanding. What amount of gain on restructuring of debt
should be reported by Melaren in 2020?
A. 0 B. 55,000 C. 195,000 D. 355,000

59) On December 31, 2021, Thyro Company shows the following data with respect to its matured obligation.

Note payable P5,000,000

Accrued interest payable 500,000

The company is threatened with court suit if it count not pay its maturing debt. Accordingly, the company enters into an
agreement with the creditor for the issuance of share capital in full settlement of the note payable. The agreement provides
for the issue of 50,000 ordinary shares with par value of P50. The ordinary share is currently quoted at P70.
How much is the share premium arising from the debt restructuring considered as “equity swap”?
A. 3,000,000 B. 1,500,000 C. 2,000,000 D. 1,000,000

Use the following information for the next three (3) questions:
On January 1, 2023, Kobiachi Company issued P3,000,000, 11% bonds for P3,195,000. The market rate of interest for these bonds
is 10% and mature on January 1, 2034. Interest is payable annually on December 31. Kobiachi used the effective-interest method
of amortization.

On December 31, 2024, Kobiachi was under financial difficulty and therefore entered into a debt restructuring agreement with the
credit. In the agreement, Kobiachi will issue 20,000 shares with P100 par value on December 31, 2024 to settle the bonds. On
such date, the shares do not have fair value but the bonds are quoted at 104. Kobiachi was unable to pay the required interest on
December 31, 2024. Interest was accrued on such date.

60) What is the interest expense for 2024?

A. 330,000 B. 319,500 C. 318,450 D. 353,810

61) What is the carrying amount of the bonds payable on December 31, 2024 before accrued interest?
A. 3,195,000 B. 3,184,500 C. 3,172,950 D. 3,000,000

62) What amount of gain on extinguishment should be recognized for 2024?

A. 307,950 B. 382,950 C. 120,000 D. 52,950

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63) There is substantial modification of terms of an old financial liability if the gain or loss on extinguishment is
A. At least 10% of the new liability C. At least 10% of the carrying amount of the old liability
B. Less than 10% of the new liability D. Less than 10% of the carrying amount of the old liability

64) In a debt settlement in which the debt is continued with modified terms, a gain should be recognized at the date of settlement
whenever the
A. Carrying amount of the debt is less than the total future cash flows.
B. Carrying amount of the debt is greater than the present value of the future cash flows.
C. Present value of the debt is less than the present value of the future cash flows.
D. Present value of the debt is greater than the present value of the future cash flow.

65) Grey Company has an overdue 8% note payable to City Bank at P8,000,000 and recorded accrued interest of P640,000. As a
result of a settlement on January 1, 2017, City Bank agreed to the following restructuring arrangement.
• Reduced the principal obligation to P7,000,000.
• Forgave the P640,000 accrued interest.
• Extended the maturity date to December 31, 2018.
• Annual interest of 10% is to be paid on December 31, 2017 and 2018. (PVF 4 Decimal)

What is the gain on extinguishment of debt to be recognized for 2017?

A. 750,950 B. 1,640,000 C. 1,254,930 D. 1,390,590

66) Due to adverse economic circumstances and poor management, Bontoc Company negotiated a restructuring of P8,500,000
note payable to Second Bank. The bank has agreed to reduce the face amount of the note from P8,500,000 to P8,000,000,
reduce the interest rate from 14% to 10%, and extent the due date one year from date of restructuring. The restructuring was
done at the beginning of the current year. There is no unpaid interest on the restructured note at this time. What is the gain
on extinguishment of debt to be recognized for 2017?
A. 780,640 B. 165,040 C. 0 D. 1,970,640

Use the following information for the next two (2) questions:
Due to adverse economic circumstances and poor management, Lyka had negotiated a restructuring of the 8% P7,000,000 note
payable to a bank on January 1, 2023. There is no accrued interest on the note. Lyka has reduced the principal obligation from
P7,000,000 to P6,000,000 and extend the maturity to 3 years on December 31, 2025. However, the new interest rate is 11%
payable annually every December 31. The present value of 1 at 8% for three periods is 0.79 and the present value of an ordinary
annuity of 1 at 8% for three periods is 2.58.

67) What is the gain on modification of debt for 2023?

A. 557,200 B. 577,200 C. 980,000 D. 0

68) What is the interest expense for 2023?

A. 515,424 B. 480,000 C. 560,000 D. 660,000

Use the following information for the next two (2) questions:
Turt Company is experiencing financial difficulty and is negotiating trouble debt restructuring with its creditor to relieve its financial
stress. Turt has a P5,000,000 note payable to Metrobank. The bank is considering acceptance of an equity interest in Turt Company
in the form of 400,000 ordinary shares with a fair value of P12 per share. The par value of the ordinary share is P10 per share.

69) If the issue of equity is treated as a conversion of an existing debt, what is the amount of gain to be reported by Turt in its
profit or loss statement as a result of the restructuring?
A. 1,000,000 B. 500,000 C. 200,000 D. 0

70) If the issue of equity is treated as an extinguishment of an exiting debt instrument, what amount of gain or loss should Turt
Company report in its profit or loss statement as a result of the restructuring?
A. 1,000,000 B. 500,000 C. 200,000 D. 0

CHAPTER 8 ‒ NON CURRENT LIABILITIES Page 12