Advanced Accounting Answer Key

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Reorganization and Troubled Debt Restructuring 135

CHAPTER 8

MULTIPLE CHOICE ANSWERS AND SOLUTIONS

8-1: a
Trade accounts payable (P52,000 + P62,700)P114,700
12% preferred stock (5,000 x P1)P  5,000
Paid in capital in excess of par (5,000 x P9)45,000
Cash (P62,700 x P0.80)_50,160_100,160

Gain from discharge of indebtednessP  14,540

8-2: c

8-3: c

8-4: b
Carrying value of the note payable:
PrincipalP600,000
Interest__60,000P660,000
Restructured value:
PrincipalP400,000
Interest_110,000_510,000

Gain on debt restructuringP150,000

8-5: d
Other income:
Fair value of landP450,000
Books value of land_360,000

Other incomeP  90,000

Extraordinary gain:
Book value of note payable
PrincipalP500,000
Interest__60,000P560,000
Fair value of land_450,000

Extraordinary gainP110,000

8-6: a
Book value of bonds payableP500,000
Par value of preferred stock (5,000 shares x P100)_500,000

No gain no lossP     –0–

136 Chapter 8

8-7: a

Book value of notes payable:
PrincipalP  2,500
Interest___500P  3,000
Par value of common stock issued (200 shares x P5)__1,000

Additional paid in capitalP  2,000
Add gain on payment of accounts payable:
Book valueP 10,000
Payment__8,000__2,000

Total gain on debt dischargeP  4,000

8-8: a
Carrying value of debt:
Note payableP100,000
Interest payable__12,000P112,000
Fair value machinery_(36,000)

Balance of debtP  76,000
Restructured debt:
Note payableP 50,000
Interest (P50,000 x .08 x 2)___8,000__58,000

Restructuring difference (gain)P 18,000

8-9: d
PrincipalP300,000
Interest payable (300,000 x 10%)__30,000

Carrying valueP330,000

8-10: c
Should be P310,600
Restructured principal of note payableP260,000
Interest payable:
On book value (P300,000 x 10% 30%)P  9,000
On restructured (P260,000 x 8% x 2)_41,600__50,600

Future cash flows to liquidate the debtP310,600

8-11: d

8-12: d
Loss on transfer of land:
Original costP290,000
Market value_270,000P 20,000

Gain on restructuring of debt:
Carrying value of debtP300,000
Market value of land_270,000P 30,000
Reorganization and Troubled Debt Restructuring 137

8-13: a
Transfer gain (loss):
Carrying amount of equipmentP80,000
Fair value of equipment 75,000
Transfer lossP(5,000)

Restructuring gain:
Carrying amount of the debtP100,000
Fair value of equipment transferred 75,000
Restructuring gain P 25,000

8-14: d
Carrying amount of real estate transferredP100,000
Fair value of real estate 90, 000
Loss on restructuring of payablesP(10,000)

8-15: d
Carrying amount of liabilityP150,000
Fair value of real estate transferred 90,000
Restructuring gain P 60,000

8-16: c
Gain on revaluation of land (120,000 – 85,000)P 35,000
Gain on the extinguishment of debt (185,000 – 120,000) 65,000
Total gain P100,000

8-17: a
Carrying value of debt (P800,000 + 80,000)P880,000
Total future payments (P700,000 + 80,000) 780,000
Restructuring gain P100,000

8-18: a
First determine the expected future cash flows as follows:
70,000 x .79719=P55,803
5,600 x 1.69005= 9,464
Present value of future cash flow P65,267

The interest revenue can be computed using the effective interest method
as follows:
Present value at 12/31/06P65,267
Interest income at 12/31/07 (65,267 x 12%)...
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