DE LA SALLE LIPA

College of Business, Economics, Accountancy and Management

Accountancy Department
Theory of Accounts – Reviewer
____________________________________________________________________________________________________________

COVERAGE:
Debt Restructuring
Direction: Read and select the best answer for the following questions.

1. It is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or
determinable future time a sum certain in money to order or to bearer.
a. Bill of exchange
b. Promissory note
c. Check
d. Negotiable instrument
2. It is a situation where the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants to the debtor concession
that would not be granted in a normal business relationship.
a. Debt conversion
b. Debt extinguishment
c. Debt restructuring
d. Debt liquidation
3. The following are types of debt restructuring, except
a. Liability swap
b. Asset swap
c. Equity swap
d. Modification of terms
4. 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.
a. Liability swap
b. Asset swap
c. Equity swap
d. Modification of terms
5. PAS 39, par. 41, provides that the gain or loss on debt restructuring through asset swap shall be presented in the profit or loss. How shall
the gain or loss be computed?
a. Carrying amount of the financial liability less fair value of the asset.
b. Carrying amount of the financial liability less fair value of the liability.
c. Carrying amount of the asset less fair value of the asset.
d. Carrying amount of the financial liability less carrying amount of the asset.
6. 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 instruments to the creditor.
a. Liability swap
b. Asset swap
c. Equity swap
d. Modification of terms
7. IFRIC 19 provides that when equity instruments issued to extinguish all or part of a financial liability are recognized initially, an entity shall
measure the equity instrument in what order of priority?
I. Fair value of the financial liability
II. Carrying value of the financial liability
III. Fair value of the equity instrument
a. I-II-III
b. III-I-II
c. II-III-I
d. I-III-II
8. The difference between the carrying amount of the financial liability and the initial measurement of the equity instrument under equity swap
shall be recognized in
a. Profit or loss
b. Share premium
c. Share capital
d. Retained earnings

DLSL CPA Board Operation – Theory of Accounts Page 1 of 2

 9. Under equity swap, which of the following statements is false?
a. Share premium will be credited.
b. Gain or loss on debt extinguishment will never arise.
c. Share capital will be credited.
d. The liability account will be debited.
10. PAS 39 provides that a 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. Under Application Guidance 62 of PAS 39, there is substantial
modification of terms if the gain or loss on extinguishment is
a. At least 5% of the old financial liability
b. At least 20% of the new financial liability
c. At least 10% of the old financial liability
d. At least 10% of the new financial liability
11. In discounting the cash flows of the new financial liability in case of substantial modification of terms, what rate shall be used?
a. Original nominal rate
b. Prevailing effective interest rate
c. New nominal rate
d. Original effective interest rate
12. In case there is no substantial modification of terms, the entity
a. Shall recognize gain on debt extinguishment.
b. A new liability is assumed by the entity.
c. The old liability is simply continued but with modified interest charges.
d. The difference between the old and new liability shall be credited to retained earnings.

DLSL CPA Board Operation – Theory of Accounts Page 2 of 2