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Activity Chapter 6

The document provides examples of accounting for debt restructuring and troubled debt situations. It includes 5 examples that show calculations for gains or losses from calling bonds, settling debt for less than face value, exchanging debt for assets, granting equity interest to settle debt, and modifying terms of a note through a troubled debt restructuring. The examples calculate the difference between the carrying amount of the original debt and the fair or present value of the consideration provided or received to determine the gain or loss on the debt restructuring.

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Randelle James Fiesta
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3K views

Activity Chapter 6

The document provides examples of accounting for debt restructuring and troubled debt situations. It includes 5 examples that show calculations for gains or losses from calling bonds, settling debt for less than face value, exchanging debt for assets, granting equity interest to settle debt, and modifying terms of a note through a troubled debt restructuring. The examples calculate the difference between the carrying amount of the original debt and the fair or present value of the consideration provided or received to determine the gain or loss on the debt restructuring.

Uploaded by

Randelle James Fiesta
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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ACTIVITY CHAPTER 6

1. On July 31, 20x0, Dome Co. issued ₱1,000,000 of 10%, 15-year bonds at par and
used a portion of the proceeds to call its 600 outstanding 11%, ₱1,000 face value
bonds, due on July 31, 2x10, at 102. On that date, unamortized bond premium
relating to the 11% bonds was ₱65,000. In its 20x0 income statement, what amount
should Dome report as gain or loss, before income taxes, from retirement of bonds?
Ans. 53,000 gain
Solution:
Redemption price (600 x 1,000 x 102%) 612,000
Less: Carrying amount of bonds:
Face amount (600 x 1,000) 600,000
Unamortized premium 65,000 665,000
Gain on retirement 53,000

2. During 20x4 Peterson Company experienced financial difficulties and is likely to


default on a ₱500,000, 15%, three-year note dated January 1, 20X2, payable to
Forest National Bank. On December 31, 20X4, the bank agreed to settle the note
and unpaid interest of ₱75,000 for 20X4 for ₱50,000 cash and marketable securities
having a carrying amount of ₱375,000. Peterson's acquisition cost of the securities is
₱385,000. What amount should Peterson report as a gain from the debt restructuring
in its 20x4 income statement?
Ans. 150,000
Solution:
Payment for the liability: 50,000
Carrying amount of investment securities 375,000 425,000
Carrying amount of liability settled:
Principal 500,000
Accrued interest 75,000 575,000
Gain on settlement 150,000

3. Casey Corporation entered into a troubled-debt restructuring agreement with First


State Bank. First State agreed to accept land with a carrying amount of ₱85,000 and
a fair value of ₱120,000 in exchange for a note with a carrying amount of ₱185,000.
What amount should Casey report as gain in its income statement?
Ans. 100,000
Solution:
(185,000 carrying amt. of note - 85,000 carrying amt. of land) = 100,000 gain

4. Wood Corp., a debtor undergoing financial difficulties granted an equity interest to


a creditor in full settlement of a ₱28,000 debt owed to the creditor. At the date of this
transaction, the equity interest had a fair value of ₱25,000 and par value of ₱20,000.
What amount should Wood recognize as gain on restructuring of debt?
Ans. 3,000
Solution:
(28,000 debt owed to the creditor – 25,000 fair value) = 3,000
5. In 20X2, May Corp. acquired land by paying ₱75,000 down and signing a note
with a maturity value of ₱1,000,000. On the note’s due date, December 31, 20X7,
May owed ₱40,000 of accrued interest and ₱1,000,000 principal on the note. May
was in financial difficulty and was unable to make any payments. May and the bank
agreed to amend the note as follows:
• The ₱40,000 of interest due on December 31, 20X7, was forgiven
• The principal of the note was reduced from ₱1,000,000 to ₱950,000 and the
maturity date extended 1 year to December 31, 20X8.
• May would be required to make one interest payment totaling ₱30,000 on
December 31, 20X8.
• The original effective interest rate is 10% while the current market rate on
December 31, 20X7 is 12%.
As a result of the troubled debt restructuring, May should report a gain, before taxes,
in its 20X7 income statement of
Ans. 149,092
Solution:
The modification is analyzed as follows:
Old terms New terms
Principal 1,000,000 950,000
Accrued interest 40,000 30,000
Remaining term ('n') 1 year

The present value of the modified liability is computed as follows:


Future cash flows PV of 1 @10%, n=1 Present value
Principal 950,000 0.90909 863,636
Interest 30,000 0.90909 27,273
Present value of the modified liability 890,908

The difference between the old liability and the new liability is tested for substantiality.
Carrying amount of old liability 1,040,000
(1M principal + 40,000 accrued interest)
Present value of modified liability 890,908
Difference 149,092

Difference 149,092
Divide by: Carrying amount of old liability 1,040,000
14.34%

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