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Module 2 Assignment

The document contains 7 problems related to accounting for notes payable and debt restructuring. The problems cover topics such as recording the purchase of land and buildings using notes payable, calculating accrued interest, determining the amount to record for notes payable, and journal entries for debt restructuring transactions including forgiveness of interest and principal, changes in payment terms, and asset swaps.

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ricamae saladaga
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392 views

Module 2 Assignment

The document contains 7 problems related to accounting for notes payable and debt restructuring. The problems cover topics such as recording the purchase of land and buildings using notes payable, calculating accrued interest, determining the amount to record for notes payable, and journal entries for debt restructuring transactions including forgiveness of interest and principal, changes in payment terms, and asset swaps.

Uploaded by

ricamae saladaga
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Internal

NOTES PAYABLE & DEBT RESTRUCTURING


ASSIGNMENT

INSTRUCTION: Write the answer with the solution in a separate piece of paper. Turn it over in
class on the date as indicated.

PROBLEM 1
On January 1, 2020, West Company acquired a tract of land for P1,000,000. The entity paid
P100,000 down and signed a two-year promissory note the balance plus 10% interest
compounded annually. The note matures on January 1, 2022.

Required:
Prepare journal entries to record:
1. Purchase of land on January 1, 2020
2. Accrued interest on December 31, 2020
3. Accrued interest on December 31, 2021
4. Full payment of the note on January 1, 2022

PROBLEM 2
South Company acquired a building for P5,000,000. The entity paid P500,000 down and signed
a noninterest bearing note for the balance which is payable in 3 equal annual installments every
December 31 of each year.
The prevailing rate for a note of this type is 12%. The present value of an ordinary annuity of 1
for three periods is 2.4018.

Required:
Prepare journal entries to record the purchase of building on January 1, 2020, first installment
payment on December 31, 2020 and interest expense for 2020.

PROBLEM 3
Joshua Company bought a new machine and agreed to pay in equal annual installment of
P600,000 at the end of each of the next five years. The prevailing interest rate for this type of
transaction is 12%.
The present value of an ordinary annuity of 1 at 12% for five periods is 3.60. The future amount
of an ordinary annuity of at 12% for five periods is 6.35. The present value of 1 at 12% for five
periods is 0.567.
Internal

Required:
1. What amount should be reported as note payable if financial statements were prepared
today?
2. What is the interest expense for the first year?

PROBLEM 4
Mann Company reported a 10% note payable of P3,600,000 on June 30, 2020. The note is
dated October 1, 2018 and payable in three equal annual payments of P1,200,000 plus interest.
The first interest and principal payment was made on October 1, 2019.
On June 30, 2020, what amount should be reported as accrued interest payable for this note?

PROBLEM 5
Rainbow Company showed the following balances on December 31, 2020:
Note payable – due December 31, 2020 1,000,000
Accrued interest payable 200,000

The entity is in financial distress and negotiates with the creditor for the settlement of the note
payable.
Consequently, the entity transferred a patent to the creditor in full satisfaction of the note
payable.
The patent has a carrying amount of P600,000 and a fair value of P1,100,000.

Required:
1. Prepare journal entries to record the asset swap on the books of Rainbow Company.
a. Under IFRS
b. Under USA GAAP

PROBLEM 6
Sunshine Company showed the following data with respect to a matured obligation:

Mortgage Payable 4,000,000


Accrued interest payable 300,000
Internal

The entity is 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.
The agreement provided for the issue of 35,000 shares with par value of P100. The share is
currently quoted at P130. The fair value of the liability is P4,500,000.

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 7
On January 1, 2020, Sunrise Company is experiencing extreme financial pressure and is 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, 2020 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, 2020 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, 2023.
The present value of 1 at 12% for four periods is 0.6355 and the present value of an ordinary
annuity of 1 at 12% for four periods is 3.0373.
Required:
Prepare all indicated entries for 2020.

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