Question

Kifer Corp. owes P450,000 to First Trust. The debt is a 10-year, 12% note due December 31, 2016. Because Kifer Corp. is in financial trouble, First Trust agrees to axtend the maturity date December 31, 2018, reduce the principal to P370,000 and reduce the interest rate of 5%, payable annually on December 31. Kifer's market rate of interest is 8%. Prepare the journal entries on Kifer's books on December 31, 2016, 2017, and 2018. Present value of restructured cash flows:_______,Present value of P370,000 due in 2 years at 8% interest payable annually____,Present value of P11,000 interest payable annually for 2 years at 8%____,Fair value of note_____.Prepare Kifer Corp's entries,(a)2016;Note Payable (old)_____,Gain on extinguishedment of debt_____,note payable(new). (b) 2017 ,Interest Expense_____,Note payable____, Cash____,(c) 2018, Interest Expense____,Note Payable_____, Cash____

Answer 1

Present value of restructured cash flows: Present value of P370,000 due in 2 years at 8% interest payable annually (+) Present value of P11,000 interest payable annually for 2 years at 8% Present value of restructured cash flows (Fair value of note) p 317,216 [Ref: workings] P 32,990 Ref: workings] P 350,206 P317,216 P32,990] Journal Entries in Kifer Corp's books: Event Year ACCOUNT TITLES DEBIT CREDIT REMARKS Note Payable (Old) P 450,000 a) 2016 Note Payable (New) Gain on Extinguishment of Debt P 350,206 [As calculated above] P 99.794 [Balancing figurel b) [P 350,206 x 8%) 2017 Interest Expense Note Payable P 28,016 P 9,516 [Balancing figure] Cash P 18,500 [P 370,000 x 5%) [P 350,206 + P 9,516 x 8% [P 350,206P 9,516] 2018 Interest Expense P 28,778 P 359,722 Note Payable Cash P 388,500 [Balancing figure]

Workings PV of P370,000 P11,000 PV of Annual interest rate, RATE # of years extended, NPER Annual interest payment, PMT Maturity value at the end, FV Interest compounding type, TYPE Present Value of future Cash flow P 317,216 P 32,990 [Ref: NOTE] NOTE PV of maturity payment of P370,000 is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate-8%; nper-2; pmt:0; f-370000; type :0. Here, value for fv is negative as it denotes cash inflows; type 0 because interest compounds at the end of each year only PV of annual interest payment of P18,500 is calculated using EXCEL FUNCTION PV(rate,nper,pmt,fv,type) where rate=8%; n per-2; pmt=-18500; fv:0; type-0. Here, value for pmt is negative as it denotes cash inflows; type 0 because interest compounds at the end of each year only 8% PO P 370,000 P 18,500 [P 370,000 x 5%) p o [Given] 0 =0 if interest compounds paid at the end of each year; 1 if interest compounds at the beginning of each year PV of P370,000 PV of P11,000 2 Annual interest rate, RATE of years extended, NPER Annual interest payment, PMT 5 Maturity value at the end, FV 6 Interest compounding type, TYPE 3 P0 P 370,000 -85*596 [P 370,000 x 5%) p o [Given 0-0 if interest compounds paid at the end of each year; 1 if interest compounds at the beginning of each year 7 Present Value of future Cash flows PV(82,83,B4,-B5,B6) PV(C2,C3,-C4,C5,C6) [Ref: NOTE]