You were assigned to audit the borrowings of your client, Benedict Company , as of and for

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Question:

You were assigned to audit the borrowings of your client, Benedict Company, as of and for the year ended December 31, 2022. Upon examining their records, and inquiry wit management, you have found out that the company has the following notes outstanding as of December 31, 2022:

A 10% note issued to Supreme Inc. in exchange for a second-hand delivery vehicle on June 30, 2022. The face amount of the note is P800,000 and is due on June 30, 2027. Interest is payable semi-annually every June 30 and December 31. On the date of issuance, the delivery vehicle does not have a reliable fair market value, and the annual prevailing market rate of interest at that time for notes with similar characteristics is 12%.

A three-year 12% note issued to Ace Company with principal amount of P1,500,000 dated November 30, 2021. The principal is payable in three installments of P500,000 plus interest on outstanding balance every November 30, beginning on November 30, 2022. The note was issued in exchange for a track of land with a cash price of P1,500,000.

A four-year, 11% note issued to Bank of Mindoro with principal amount of P5,000,000 dated December 31, 2019, when the prevailing market rate of interest at that time was 9%. Interest is payable annually. Due to business reverses encountered by the company in 2022, Benedict expects that it will encounter difficulty of settling this note when it becomes due next year. Hence, the company negotiated a restructuring of this note with a bank. Terms of the restructuring include reducing the principal amount to P4,000,000 and the interest from 11% to 10%. The prevailing market interest on December 31, 2022 is 9.5%. The maturity of the note was also extended to December 31, 2025. The interest has been paid by the company as of December 31, 2022.

Based on the above and the result of your audit, answer the following (Round off present value factors to four decimal places and final answers to the nearest peso.)

3. Total interest expense in 2022.

4. The gain to be recognized as a result of modification of terms related to the restructuring of note issued to Bank of Mindoro.