Baguio Company is experiencing financial difficulty and is renegotiating debt restructuring with its creditor to relieve its financial distress. Baguio Company has a P5,000,000 note payable to First Bank. The bank is considering two alternatives: A. Acceptance of land owned by Baguio Company carried at historical cost of P2,800,000 and with a fair value of P3,000,000. B. Acceptance of an equity interest on Baguio Company in the form of 40,000 shares with a par value of P100 per share. The note payable has a current fair value of P5,500,000. Due to adverse economic circumstances and poor management, Tagaytay Highlands Company has negotiated a restructuring of its 9% P6, 000,000 note payable to Second Bank due on January 1, 2021. There is no accrued interest on the note. The bank has reduced the principal obligation from P6, 000,000 to P5, 000,000 and extends the maturity to 3 years or on December 31, 2023. However, the new interest rate is 13% payable annually every December 31. The present value of 1 at 9% for three periods is .77 and the present value of an ordinary annuity of 1 at 9% for three periods is 2.53. 1. What is the gain on extinguishment of debt to be recognized for 2021? 2. Which alternative is better and by how much if only the gain (loss) on extinguishment of debt would be considered?
Baguio Company is experiencing financial difficulty and is renegotiating debt restructuring with its creditor to relieve its financial distress. Baguio Company has a P5,000,000 note payable to First Bank. The bank is considering two alternatives:
A. Acceptance of land owned by Baguio Company carried at historical cost of P2,800,000 and with a fair value of P3,000,000.
B. Acceptance of an equity interest on Baguio Company in the form of 40,000 shares with a par value of P100 per share. The note payable has a current fair value of P5,500,000.
Due to adverse economic circumstances and poor management, Tagaytay Highlands Company has negotiated a restructuring of its 9% P6, 000,000 note payable to Second Bank due on January 1, 2021. There is no accrued interest on the note. The bank has reduced the principal obligation from P6, 000,000 to P5, 000,000 and extends the maturity to 3 years or on December 31, 2023. However, the new interest rate is 13% payable annually every December 31. The present value of 1 at 9% for three periods is .77 and the present value of an ordinary annuity of 1 at 9% for three periods is 2.53.
1. What is the gain on extinguishment of debt to be recognized for 2021?
2. Which alternative is better and by how much if only the gain (loss) on extinguishment of debt would be considered?
Trending now
This is a popular solution!
Step by step
Solved in 3 steps
