RCBC loaned a 3-year 10%, P10,000,000 to ArayKoBe Corporation on December 27, 2018, interest was payable annually. The effective interest at the time of loan was 8%. There was a downward trend in the industry that ArayKoBe was operating and became less liquid and unable to pay of its maturing debts. ArayKoBe was unable to pay the interest for 2020. On December 31, 2020 ArayKoBe negotiated the loan terms with RCBC.

 

RCBC agreed to the following modifications:

Condonation of interest

Transaction costs of P100,000 was incurred

Principal amount will be reduced to P7,500,000

The Interest rate will be reduced to 7% of the new principal

New maturity date will be on December 31, 2023

The market interest rate at date of modification is 12%

Question 1: How much is the gain or loss extinguishment of ArayKoBe?

Question 2: Is there SMOT?

Answer rating: 100% (QA)

Question 1 To determine the gain or loss on extinguishment we need to compare the carrying amount of ... View the full answer