Topic: Week 15 to 17 - Accounting for Financially Distressed Cor

When a financially distressed corporation undergoes liquidation, how should its assets be valued in the financial statements?

• A. At their historical cost

• B. At their carrying amount less accumulated depreciation.

• C. At their fair value less costs to sell.

• D. At their original purchase price.

Company A, which is financially distressed, owes ₱5 million to a creditor. The creditor agrees to restructure the debt by forgiving ₱1.5 million and requiring Company A to issue equity shares worth ₱2 million to settle the remaining balance.

What is the gain or loss on debt restructuring?

• A. Gain of ₱1,500,000

• B. Loss of ₱1,500,000

• C. Gain of ₱2,000,000

• D. Loss of ₱2,000,000

How should contingent liabilities be accounted for in a business combination involving a financially distressed corporation?

• A. Recognize them at fair value on the acquisition date if the fair value can be reliably measured

• B. Ignore them in the acquisition accounting process

• C. Recognize them only if they are highly probable to result in a future cash outflow.

• D. Record them at their book value as per the acquired company’s financial statements.

Which of the following is NOT a characteristic of a financially distressed company?

• A. Its ability to continue existence is doubtful.

• B. It has consistent profitability and growth.

• C. It contemplates or plans liquidation.

• D. It is under liquidation.

Which of the following is NOT a key financial indicator suggesting a corporation is financially distressed?

• A. High debt-to-equity ratio

• B. Consistently increasing profit margins

• C. Negative operating cash flow

• D. Missed debt payments

Liabilities and Equity in the Statement of Affairs Liabilities are classified according to their legal priority and secured status and are followed by capital items. Liability and capital are normally classified in groups and in the following order:

I. Capital

II. Fully secured creditors

III. Contingent liabilities

IV. Preferred creditors

V. Partially secured creditors

VI. Unsecured creditors

• A. V,IV,I,III,VI,II

• B. I,II,III,IV,V,VI

• C. IV,II,V,VI,I,III

• D. IV,II,V,VI,III,I

Statement 1: A concession is granted when there is a change in the original terms of the obligation making it easier for the debtor to comply with the new terms. The creditor agrees to grant a concession to recover as much of its investment (receivable) as possible.

Statement 2: Quasi-reorganization is a permissive but not a mandatory procedure under which a financially distressed entity restates its accounts and establishes a fresh start in accounting sense. The process requires approval of the shareholders, creditors and the The Department of Trade and Industry (DTI).

• A. Both Statements are True.

• B. Both Statements are False

• C. Only Statement 1 is True.

• D. Only Statement 2 is True.

Marielag Corporation is in financial distress and enters into a debt restructuring agreement with its creditors. The restructuring terms include an extension of the debt's maturity, but no principal forgiveness. The new terms also involve a lower interest rate. What would be the appropriate accounting treatment under Philippine Financial Reporting Standards (PFRS) for this situation?

• A. The loan is considered a distressed loan, and Marielag Corporation should report the loan at fair value, recognizing the difference between the loan's book value and fair value as an impairment loss.

• B. The debt is extinguished and replaced with a new liability at the present value of the modified cash flows, and Marielag Corporation should recognize a gain or loss on the extinguishment of debt.

• C. The restructuring is treated as a modification of the debt terms, and Marielag Corporation should continue recognizing the original liability, adjusting for the present value of future cash flows based on the modified terms.

• D. Marielag Corporation should derecognize the original liability and recognize a new liability equal to the fair value of the restructured debt, with the difference recognized in the income statement.

What is the primary goal of debt restructuring for a financially distressed corporation?

• A. Increase shareholder dividends

• B. Reduce debt obligations to avoid bankruptcy

• C. Sell off all assets

• D. Close all operations permanently

What is a quasi-reorganization?

• A. A complete liquidation of the company

• B. A restatement of financial statements to eliminate accumulated losses

• C. A merger with another company

• D. A restructuring of the company's debt