Let’s Check
1. Under a debt restructuring involving substantial modification of terms, the future cash flows
under the new terms shall be discounted using (a. Market rate of interest b. Original effective
interest rate)
2. There is substantial modification of terms of an old financial liability if the gain or loss on
extinguishment is (a. At least 10% of the carrying amount of the old liability b. At least 10% of
the carrying amount of the new liability)
3. The accounting issue on extinguishment of a financial liability by issuing equity instruments is now
well settled under IFRIC 19. (TrueorFalse)
4. An asset swap is the issuanceofsharecapitalbythedebtortothecreditor in
fullprpartialpaymentofanobligation. (TrueorFalse)
5. Under PFRS 9, asset swap isrecorded as iftwotransactionshavetakenplace; sale
oftheassetandextinguishmentofliability. (TrueorFalse)
6. The differencebetweenthecarryingamountoftheliabilityandthefairvalueoftheassetis gain orloss
from restructuring. (TrueorFalse)
7. Maturity value concession involves a reduction of interest rate, forgiveness of unpaid interest or
moratorium oninterest. (TrueorFalse)
8. Under USA GAAP, the gain or loss on debt restructuring is the difference between the carrying
amount of the old liability and the present value of the new restructured liability. (TrueorFalse)
9. When the gain on extinguishment of liability is less than 10% of the carrying amount of the old
financial liability, theamount should be recognized. (TrueorFalse)
10. USA GAAP shall be followed in accounting for debt restructuring conceived as modification of
terms. (TrueorFalse)
Let’s Analyze :
Answer the following adapted problems:
1. During 2019, Shyrill company experienced financial difficulties and is likely to default on a
9,000,000, 15% three year note dated Jan. 1, 2017, Payable to Canque Bank. On Dec. 31,
2019, the bank agreed to settle the note and unpaid interest of 1,350,000 for 2019 for
7,380,000 cash payable on Jan. 31, 2020. The amount that Shyrill company report as gain
from extinguishment of debt in its 2019 income statement is ________________ and the entry
in connection with the settlement is____________________.
Answer: N/P 9,000,000
I/P 1,350,000
Cash 7,380,000
Gain 2,970,000
2. Sunset Company showed the following data with respect to a matured obligation:
Mortgage payable 6,400,000
Accrued interest payable 480,000
The entity is threatened with a court suit if it could not pay its maturing debt. Accordingly, the
entity entered into an agreement with the creditor for the issuance of share capital in full settlement
of the mortgage.
The agreement provided for the issue of 35,000 shares with par value of 80. The share is currently
quoted at 104. The fair value of the liability is 3,600,000.
Required: Prepare the journal entry to record the equity swap on the books of Sunset Company.
Answer: M/P 6,400,000
AIP 480,000
Share capital 35,000 *80 2,800,000
Gain 3,240,000
Share premium 840,000
35,000 * 104 = 3,640,000 – 6,880,000=3,240,000
3,640,000-2,800,000=840,000
3. Seal company is experiencing financial difficulty and is negotiating debt restructuring with
its creditor to relieve its financial stress. Seal has a 2,000,000 note payable to United
Bank. The bank is considering acceptance of an equity interest in Seal company in the
form of 200,000 ordinary shares fairly valued at 9.6 per share. The par value is 8 per
share. How much share premium should be recognized from the debt restructuring?
Answer: N/P 2,000,000
Share capital 1,600,000
Gain 80,000
Share premium 320,000
9.6 (200,000) =1,920,000 – 2,000,000=80,000
