On January 1, 2020, Jackie Company issued a note with a face amount of P5,000,000. The note carried an interest rate of 10% payable every yearend for three years. The market rate of interest on similar notes is 12%. Scenario A: The terms of the note were modified on June 30, 2022. The principal is reduced by P1,000,000. The accrued interest is forgiven. The annual interest is reduced to 8% payable every December 31 and June 30, starting December 31, 2022 until December 31, 2024. Scenario B: The terms of the note were modified on June 30, 2022. The principal is reduced by P250,000. The accrued interest is forgiven. The annual interest, however, is raised to 12% payable every December 31 and June 30, starting December 31, 2022 until December 31, 2024. Scenario C: Jackie extinguished the note on January 1, 2022 by issuing 150,000 of its own P25 par value shares when its fair value is P28.5. The note is quoted at 101 on the extinguishment date. How much is the gain or loss from debt restructuring under Scenario A? [Indicate if it is a gain or loss] How much is the interest expense for 2022 under Scenario A? How much is the gain or loss from debt restructuring under Scenario B? [Indicate if it is a gain or loss] How much is the carrying amount of the new liability on the date of terms modification under Scenario B? How much is the Share Premium arising from the debt restructuring assuming the shares are valued at the fair value of the note under Scenario C? How much is the gain or loss on debt restructuring assuming the shares are valued at the carrying amount of the note under Scenario C?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

On January 1, 2020, Jackie Company issued a note with a face amount of P5,000,000. The note carried an interest rate of 10% payable every yearend for three years. The market rate of interest on similar notes is 12%.

Scenario A: The terms of the note were modified on June 30, 2022. The principal is reduced by P1,000,000. The accrued interest is forgiven. The annual interest is reduced to 8% payable every December 31 and June 30, starting December 31, 2022 until December 31, 2024.

Scenario B: The terms of the note were modified on June 30, 2022. The principal is reduced by P250,000. The accrued interest is forgiven. The annual interest, however, is raised to 12% payable every December 31 and June 30, starting December 31, 2022 until December 31, 2024.

Scenario C: Jackie extinguished the note on January 1, 2022 by issuing 150,000 of its own P25 par value shares when its fair value is P28.5. The note is quoted at 101 on the extinguishment date.

How much is the gain or loss from debt restructuring under Scenario A? [Indicate if it is a gain or loss]
How much is the interest expense for 2022 under Scenario A?
How much is the gain or loss from debt restructuring under Scenario B? [Indicate if it is a gain or loss]
How much is the carrying amount of the new liability on the date of terms modification under Scenario B?
How much is the Share Premium arising from the debt restructuring assuming the shares are valued at the fair value of the note under Scenario C?
How much is the gain or loss on debt restructuring assuming the shares are valued at the carrying amount of the note under Scenario C?

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