Land Corporation (Philippines)
In 2X19, Land Corporation acquired land by paying P2,000,000 and signing a note with a face value of P6,000,000. On the note's due date, December 31, 2X21, Land owed P480,000 of accrued interest and P6,000,000 on the note. Land was in financial difficulty and was unable to make any payments. To solve the problem, Land and the bank agreed to amend the note as follows:
Extended the maturity to December 31, 2X23.
The P480,000 interest due on December 31, 2X21 was forgiven.
Land Corporation would be required to make an annual interest payment of P540,000 every December 31 starting 2X22.
Transaction cost incurred that is directly related to the debt restructuring was P16,850.
As of December 31, 2X21, the yield rate based on the restructured debt and after considering the amount of transaction cost is 6.24%.
Questions:
1.What type of debt restructuring is being described by the case?
2.What is the total gain from restructuring?
3.What amount should Land Corporation report as gain, before income taxes, in its 2X21 profit or loss?
4.What is the carrying amount of the obligation that should be reported in 2X22 statement of financial position?
Provide the journal entry for debt restructuring on December 31, 2X21.
5.Assuming you are the finance manager of Land Corporation, are you in favor of the type of restructuring that your company and the bank agreed to? Why?
6.Suppose the owner of Land Corporation wants an alternative to base his decision. Construct a debt restructuring arrangement using the other types of debt restructuring that would give greater benefit to the company.
below is the examples and type, but please help me to understand more.
NATURE AND FORMS OF DEBT RESTRUCTURING Debtrestructuring refers to the alteration made by the creditor to the terms of a loan. This enables the debtor to pay the amount owed. According to Valix, Peralta, and Valix (2015), the objective of the creditor in a debt restructuring is to make the best out of a bad situation or maximize the recovery of investment. There are three (3) types of debt restructuring. These are: 1. Asset Swap - It is the transfer by the debtor to the creditor of any asset, such as real estate, inventory, receivables, and investment, in full payment of an obligation. Under PFRS 9, an asset swap is treated as a, derecognition of a financial liability or extinguishment of an obligation. Any difference between the carrying amount of the financial liability and the consideration given shall be recognized in profit or loss (Valix, Peralta, & Valix, 2015). Illustrative Example 4: An entity provided the following balances on December 31, 2X19: Notes payable 2,000,000 Accrued interest payable 400,000 On December 31, 2X19, the entity transferred to the creditor land with a carrying amount of P1,500,000 and fair value of P2,200,000. Notes payable 2,000,000 Accrued interest payable 400,000 Total liability 2,400,000 Less: Carrying amount of land 1,500,000 Gain on extinguishment of debt 900,000 The journal entry to record this transaction is as follows: Notes payable 2,000,000 Accrued interest payable 400,000 Land 1,500,000 Gain on extinguishment of debt 900,0002. Equity Swap - It is a transaction whereby a debtor and creditor may renegotiate the terms of a financial liability with the result that the liability is fully or partially extinguished by the debtor issuing equity instrument to the creditor (Valix, Peralta, & Valix, 2015). Basically, an equity swap is the issuance of share as payment of an obligation. The equity instruments issued to extinguish a financial liability shall be measured at the following amounts in the order of priority (Valix, Peralta, & Valix, 2015): a. Fairvalue of equity instrument issued; b. Fairvalue of liability extinguished; and c. Carrying amount of liability extinguished. The difference between the carrying amount of the financial liability and the initial measurement of the equity instruments issued shall be recognized in profit or loss. The gain or loss on extinguishment shall be reported as a separate line item in the income statement (Valix, Peralta, & Valix, 2015). Mustrative Example 5: An entity showed the following data on December 31, 2X19: Bonds payable 5,000,000 Accrued interest payable 500,000 On December 31, 2X19, the entity issued share capital with a total par value of P2,000,000 and fair value of P4,500,000 in full settlement of the bonds payable and accrued interest. On the other hand, the fair value of the bonds payable is P4,700,000 The computation for the gain on extinguishment is as follows: Bonds payable 5,000,000 Accrued interest payable 500,000 Carrying amount of bonds payable 5,500,000 Less: Fair value of shares issued 4,500,000 Gain on extinguishment of debt 1,000,0003. Modification of Terms - It is the change of either the interest, maturity value, or both. Applying IFR5 9, the substantial modification of terms of an existing financial liability shall be accounted for as an extinguishment of the old financial liability, and the recognition of a new financial liability (Valix, Peralta, & Valix, 2015). There is a substantial modification of terms if the gain or loss on extinguishment is at least 10% or more than 10% of the old financial liability. Mustrative Example 6: An entity showed the following data on January 1, 2X19: Note payable ( due January 1, 2X15 at 14%) 5,000,000 Accrued interest payable 1,000,000 The entity is granted by the creditor the following concessions on January 1, 2X19: a. The accrued interest of P1,000,000 is forgiven. b. The principal obligation is reduced to P4,000,Q00. c. The new interest rate is 10%% payable every December 31. d. The new date of maturity is December 31, 2X22. The get the gain on extinguishment. The computation is as follows: PV of principal (4,000,000 x .5921) 2,368,400 PV of interest payments (400,000 x 2.9137) 1,165,480 Present value of new notes payable 3,533,880 4,000,00 Discount on note payable 466,120 Note payable - old 5,000,000 Accrued interest payable 1,000,000 Carrying amount of old liability 6,000,000 Present value of new notes payable 3.533,880 Gain on extinguishment of debt 2.466.120
