INTERMEDIATE ACCOUNTING 2

1) Naruku Corporation is having financial difficulty and therefore has asked Naawa Bank to restructure its P3 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 12% (round off to 5 decimal places). The note was issued at its face value.

Presented below are two independent situations.

a. Naawa Bank agrees to accept land in exchange for relinquishing its claim on this note The land has a book value of P2,000,000 and a fair value of P2,500,000.

b. Naawa Bank agrees to reduce the principal balance due to P2,000,000 and interest rate to 10%.

	12%	10%
Present value of 1 for 3 periods	0.71178	0.75132
Present value of an ordinary annuity of 1 for 3 periods.	2.40183	2.48685

Questions:

a) If uses Asset Swap, how much is the gain on restructuring?

b) With substantial modication of term, how much is the gain on restructuring?

2) At December 31, 2012, Kisu Company's liabilities include the following:

P10 million of 10% notes are due on March 31, 2017. The financing agreement contains a covenant that requires Kisu to maintain current assets at least equal to 200% of its current liabilities. As of December 31, 2012, Kisu has breached this loan covenant. On February 10, 2013, before Kisu's financial statements are authorized for issue, Kisu obtained a period of grace from Mayumi Bank until January 31, 2014, having convinced the bank that the company's normal 3 to 1 ratio of current assets to current liabilities will be reestablished during 2013.

P15 millions of noncancelable 12% bonds were issued at face value on September 30, 1991. The bonds mature on August 31, 2013. Kisu expects to have sufficient cash available to redeem the bonds at maturity.

P20 million of 10% bonds were issued at face value on June 30, 1993. The bonds mature on June 30, 2022, but bondholders have the option to call (demand payment on) the bonds on June 30, 2013. However, the call option is not expected to be exercised, given prevailing market conditions.

Question:

a) How much is the non current portion of the liability?