*................... You have been assigned to audit the financial statements of TRUE CORPORATION, a real estate developer, for the year 2020. You were given by the company controller the unadjusted balances of selected items to be included in the company's statement of financial position and income statement as of and for the year ended December 31, 2020. Audit findings are as follows: Due to the covid-19 pandemic, TRUE has experienced extreme financial pressure and has been in default in meeting interest payment on a long term note of P6,000,000 due on October 1, 2021. The interest rate is 12% payable every October 1. The accrued interest payable on October 1, 2020 is P720,000. In an agreement with PITY, the creditor, the entity obtained the following changes in the terms of note: The accrued interest on October 1, 2020 is forgiven The principal is reduced by P500,000 The new interest rate is 9% payable every October 1 The new date of maturity is October 1, 2025 The present values are as follow: "PV öf 1 for 5 periods "PV of an ordinary annuity for 5 periods @ 9% "ö.6499 3.8897 @ 12% "0.5674 3.6048 I...... Furthermore, the following are the only entries made with regards to the given transaction: September 30, 2020 Notes payable Accrued interest payable Notes payable Gain on extinguishment December 31, 2020 Interest expense 6,000,000 720,000 5,500,000 1,220,000 123,750 Accrued interest payable 123,750 One of the buildings owned by TRUE was a 3-story commercial building, the construction of which was completed at the latter part of 2019, and normally charges tenants P5,000 per square meter per month for the First floor; P3,000 per square meter per month for the Second floor; and P1,200 per square meter per month for the Third floor. A security deposit equivalent to a two-month rent is required for all tenants prior to the commencement of lease. On February 1, 2020, 800 square meters of the first floor were leased out to X for a three-year period starting March 1, 2020, the monthly rental is payable at the end of every month. Additionally, as an inducement to enter the lease, TRUE granted X the months of 2020 at 50% of the monthly rent to be free, 25% of monthly rent to be free for the the months of 2021, and the remaining months of the lease to be 10% rent free monthly. X paid the security deposit in full. Rent income of P20,000,000 was recognized in 2020 On June 1, 2020, 500 square meters of the second floor were leased out to Y for 2 years commencing on July 31, 2020. As an inducement Y was permitted to occupy the premises for the first three months of the first year to be rent-free, and to pay only 70% of the monthly rent for the second year. Y paid in full the security deposit. Rent income of P3,000,000 was recorded. On October 31, 2020, 450 square meters of the third floor were leased out to Z for one year on the same date. Because the occupancy rate is very low, Z was allowed to pay only half of its monthly rent and to pay P160,000 as a lease bonus. Z paid in full the security deposit, the whole year rent and the lease bonus amounting to P4,480,000, and was recorded as Rent income. Below are selected accounts of TRUE Corporation taken from its Unadjusted Trial Balance, December 31, 2020 which pertains to the above transactions DEBIT CREDIT *123,750 5,500,000 "ï1,000,000 "27,480,000 wwww m wwwwww Accrued interest pavab Notes payable ** ... Refundable deposit Rent 123,750 ............ .. Interest expense