Problem 11-14 (AICPA Adapted)

Hull Company is indebted to Apex Company under a P5,000,000, 12%, three-year note dated
December 31, 2015. Because of financial difficulties developing in 2017, Hull Company owed
accrued interest of P600,000 on the note on December 31, 2017.

Under a debt restructuring on December 31, 2017, Apex Company agreed to settle the note and
accrued interest for a tract land having a fair value of P4,500,000. The acquisition cost fo the land is
P3,600,000.

What amount of pretax gain on extinguishment should Hull Company report as component of
income from continuing operations in 2017.

a. 2,000,000
b. 1,400,000
c. 1,100,000
d. 900,000

Problem 11-15 (AICPA Adapted)

The following information pertains to the transfer of real estate pursuant to a debt restructuring by
Knob Company to Mene Company in full liquidation of Knob Companys liability to Mene Company.

Carrying amount of pretax gain on extinguishment should Knob Company report as component of
income from continuing operations?

a. 300,000
b. 500,000
c. 200,000
d. 0

Problem 11-16 (IAA)

Versatile Company, after having experienced financial difficulties in 2017, negotiated with a major
creditor and arrived at an agreement to restructure a note payable on December 31, 2017. The
creditor was owed principal of P3,600,000 and interest of P400,000 but agreed to accept
equipment worth P700,000 and note receivable from a Versatile Companys customer with carrying
cost of P900,000 and accumulated depreciation of P300,000.

What amount should be recognized as gain from extinguishment of debt on December 31, 2017.

a. 700,000
b. 600,000
c. 400,000
d. 0
Problem 11-17 (AICPA Adapted)

Due to extreme financial difficulties, Armada Company had negotiated a restructuring of a 10%
P5,000,000 note payable due on December 31, 2017. The unpaid interest on the note on such date
was P500,000.

The creditor agreed to reduce the face value of P4,000,000, forgive the unpaid interest, reduce the
interest rate to 8% and extend the due date three years from December 31, 2017.

The present value of 1 at 10% for three periods is 0.75 and the present value of an ordinary annuity
of 1 at 10% for three periods is 2.49.

1. What is the gain on extinguishment for 2017?

a. 1,703,200
b. 1,203,200
c. 2,000,000
d. 540,000
2. What is the interest expense for 2018?
a. 320,000
b. 379,680
c. 500,000
d. 400,000

Problem 11-18 (IAA)

Due to adverse economic circumstances and poor management, Tagaytay Highlands Company had
negotiated a restructuring of a 9% P6,000,000 note payable to Second Bank due on January 1, 2017.
There was no accrued interest on the note January 1, 2017.

The bank reduced the principal obligation from P6,000,000 to P5,000,000 and extended the
maturity to three years on December 31, 2019.

However, the new interest rate is 13% payable annually every December 31. Considering these
terms, the new effective rate is 5.58%.

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 present value of the new note payable on January 1, 2017?
a. 6,000,000
b. 5,000,000
c. 5,494,500
d. 3,850,000
2. What is the gain on extinguishment of debt to be recognized for 2017?
a. 1,000,000
b. 350,000
 c. 505,500
d. 0
3. What is the interest expense for 2017 as a result of the debt restructuring?
a. 650,000
b. 334,800
c. 450,000
d. 540,000

Problem 11-19 (AICPA Adapted)

On January 1, 2017, Granada Company had an overdue 10% note payable to First Bank at
P8,000,000 and accrued interest of P800,000.

As a result of a restructuring agreement on January 1, 2017, First Bank agreed to the following
provisions:

The principal obligation is reduced to P6,000,000.

The accrued interest of P800,000 is forgiven.
The date of maturity is extended to December 31, 2020.
Annual interest of 12% is to be paid for 4 years every December 31.

The present value of 1 at 10% for 4 periods is 0.683 and the present value of an ordinary annuity of
1 at 10% for 4 periods is 3.17.

1. What is the present value of the new note payable on January 1, 2017?
a. 6,380,400
b. 6,000,000
c. 4,098,000
d. 5,464,000
2. What is the gain on extinguishment of debt to be recognized for 2017?
a. 2,000,000
b. 2,800,000
c. 2,419,600
d. 1,619,600
3. What is the interest expense to be recognized for 2017?
a. 720,000
b. 800,000
c. 600,000
d. 638,040

Problem 11-20 (AICPA Adapted)

During 2017, Mann Company experienced financial difficulties and is likely to default on a
P5,000,000, 15% three-year note dated January 1, 2015 payable to Summit Bank. On December 31,
2017, the bank agreed to settle the note and unpaid interest of P750,000 for P4,100,000 cash
payable on January 31, 2018.
What amount should be reported as gain from extinguishment of debt in the 2017 income
statement?

a. 1,650,000
b. 900,000
c. 750,000
d. 0