Reference no: EM132947089

Questions -

Q1. On January 1, 2018 Karen Company has a long term debt of Php 6,000,000. At the end of 2017, it had started to experience extreme financial pressure and is in default in meeting interest payment on its long term note. This had continued until 2018. The company did not accrue the interest for 2018. The interest rate is 10% payable every December 31. In an agreement with the creditor, Karen Company obtained the following changes in the terms of the note:

The accrued interest is forgiven

The principal obligation will be due on December 31, 2023

The new interest rate is 8%

What is the amount of gain on debt restructuring to be recognized by Karen Company?

Q2. On December 31, 2017, Karen Company reported a deferred tax liability of Php 700,000 and a deferred tax assets of Php 200,000. At the end of 2018, Karen Company reported a deferred tax liability of Php 875,000 and a deferred tax asset of Php 0. How much is the deferred tax expense for 2018?

Q3. On January 1, 2018, Karen Company, a dealer of machines, leased a machine to Klaire Company. Data relating to the lease is as follows:

Cost of the machinery - Php 900,000

Useful life of equipment - 5 years

Lease Term - 4 years

Annual rent payable at the end of the year - Php 300,000

Interest rate implicit in the lease - 8%

Residual value - Php 50,000

Initial direct cost - Php 10,000

The lease asset reverts to Karen Company at the end of the lease term. The lease is appropriately recorded as a sales type lease. Assume that the residual is guaranteed.

Required - Based on the above facts, answer the following:

1. How much is the total interest income to be earned over the lease term?

2. How much is the total interest income in 2018?

3. How much is the profit in sale on December 31, 2018?

4. Assume that the residual value decrease by Php 6,000, how much is the loss to be recognized in the profit or loss at the end of the lease?