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An entity provided the following statement of financial position on December 31, 2017 prior to quasi-reorganization:

Current assets..................................................................................1,500,000

Property, plant & equipment....................8,500,000

Accumulated depreciation......................(1,400,000) 7,100,000

Total.......................................................................................................8,600,000

Liabilities.............................................................................................6,600,000

Share capital, P100 par, 50,000 shares..............................4,000,000

Retained earnings.........................................................................(2,000,000)

Total.......................................................................................................8,600,000

On December 31, 2017, the shareholders and creditors agreed to a quasireorganization. Accordingly, the following restatements should be made:

a. The property, plant and equipment shall be recorded at the fair value of P6,000,000.

b. The inventory is overvalued to the extent of P750,000 and shall be revalued accordingly.

c. The share capital is reduced to P750,000, 7,500 shares P100 par value.

d. Liabilities are overvalued by 600,000. The resulting deficit is charged to the share premium arising from the reorganization.

REQUIRED: Prepare journal entries to record the transactions. Then, prepare condensed financial statement after the quasi-reorganization.

ACTIVITY 4.

Quest Company is threatened with bankruptcy due to the inability to meet interest payments and fund requirements to retire P5,000,000 note payable with accrued interest payable of P400,000.

Th entity has entered into an agreement with the creditor to exchange equity instruments for the financial liability.

The terms of the exchange are 300,000 ordinary shares with P5 par value and P10 market value, and 25,000 preference shares with P10 par value and P60 market value. The fair value of the liability is P4,800,000.

Required: Prepare journal entry on the books of Quest Company to record the settlement of the note payable:

1. If the fair value of the equity instrument is used.

2. If the fair value of the liability is used.

3. If the carrying amount of the financial liability is used.