Submitted by: Limense, Princess Kathleen S.

(ZELDA & LINK COMPANY)

(1) Zelda Company is in financial trouble and could not meet maturing installments and interest on its
bank loan of P5,000,000. The accrued interest on the loan to date is P1,000,000.

The entity and the bank agreed on a "dacion en pago" arrangement. Thus, the mortgaged land and
building were 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, P6,000,000 with accumulated depreciation of
P1,800,000. The fair value of the land and building is about P5,900,000.

REQUIRED: (a) Compute for the gain or loss on extinguishment of debt and (b) prepare the journal entry
to record the "dacion en pago"

Answer:

1. Total Liability 6,000,000

Less: Carrying amount of property
Land 1,500,000
Building 4,200,000 5,700,000
Gain 300,000

2. Mortgage payable 5,000,000

Accrued interest payable 1,000,000
Accumulated depreciation 1,800,000
Land 1,500,000
Building 6,000,000
Gain on extinguishment of debt 300,000

(2) Link Company has bonds payable with face value of P5,000,000 and a carrying amount of P5,150,000.
In addition, unpaid interest on the bondw has been accrued in the amount of P300,000. The creditor has
agreed to 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.

REQUIRED: Prepare the journal entry necessary on the books of Link Company to record the settlement
of the bonds payable.

Answer:

Bonds payable 5,000,000

Premium on bonds payable 150,000
Accrued interest payable 300,000
Land 3,200,000
Gain on extinguishment of debt 2,250,000