Reference no: EM132632174

Question - Use the following information for the next two questions.

Due to adverse economic circumstances and poor management, Compostela Company has negotiated a restructuring of its P5,000,000 note payable to Valley Bank. Valley Bank has agreed to reduce the face value of the note from P5,000,000 to P4,000,000, reduce the interest rate from 15% to 10% and extend the due date three years from the date of restructuring. The restructuring will occur on December 31, 2016, the last day of Compostela's annual reporting period. The unpaid interest on the restricted loan at this time is P750,000 which is forgiven. The tax rate is 35%. (Round off present value factors to four decimal places)

1. How much is the gain on extinguishment of debt for the year 2016?

a. P550,000

b. P1,750,040

c. P2,206,720

d. P0

2. How much is the interest expense in 2017?

a. P400,000

b. P531,492

c. P399,996

d. P354,328

3. Due to adverse economic circumstances and poor management, Depressed Company has negotiated a restructuring of its P5,000,000 note payable to Benevolent Bank. Benevolent Bank has agreed to reduce the face value of the note to P4,000,000, and extend the due date three years from the date of restructuring. However, the interest rate was increased from 15% to 21%. The restructuring will occur on December 31, 2016. There is no unpaid interest on the restructured loan at this time. The tax rate is 35%. (Round off present value factors to four decimal places)

How much is the carrying amount of the note on December 31, 2017?

a. P4,000,000

b. P4,700,500

c. P4,666,667

d. P4,910,000

4. On December 31, 2016, X Corp. was indebted to Zyland Co. on a P1,000,000, 10% note. Only interest had been paid to date, and the remaining life of the note was 2 years. Because X Corp. was in financial difficulties, the parties agreed that X Corp. would settle the debt on the following terms:

Settle one-half of the note by transferring land with a recorded value of P400,000 and a fair value of P450,000

Settle one-fourth of the note by transferring 10,000, P1 par, ordinary shares with a fair market value of P15 per share

Modify the reducing the remaining one-fourth of the note by reducing the interest rate to 5% for the remaining 2 years and reducing the principal to P150,000.

What total gains should X Corp. record in 2016 from this troubled debt restructuring?

a. P100,000

b. P200,000

c. P213,024

d. P313,024