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    Note Payable 2023

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    Avrille Macalinao
    The document discusses various topics relating to accounting for notes payable, including defining notes payable, initial and subsequent measurement, accounting for interest-bearing and non-interest bearing notes payable issued for cash or property, amortization, and the option to designate notes payable at fair value through profit or loss. It provides examples of accounting entries for different types of notes payable transactions.

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    Note Payable 2023

    Uploaded by

    Avrille Macalinao
    23 views27 pages
    The document discusses various topics relating to accounting for notes payable, including defining notes payable, initial and subsequent measurement, accounting for interest-bearing and non-interest bearing notes payable issued for cash or property, amortization, and the option to designate notes payable at fair value through profit or loss. It provides examples of accounting entries for different types of notes payable transactions.

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    The document discusses various topics relating to accounting for notes payable, including defining notes payable, initial and subsequent measurement, accounting for interest-bearing and non-interest bearing notes payable issued for cash or property, amortization, and the option to designate notes payable at fair value through profit or loss. It provides examples of accounting entries for different types of notes payable transactions.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    23 views27 pages

    Note Payable 2023

    Uploaded by

    Avrille Macalinao
    The document discusses various topics relating to accounting for notes payable, including defining notes payable, initial and subsequent measurement, accounting for interest-bearing and non-interest bearing notes payable issued for cash or property, amortization, and the option to designate notes payable at fair value through profit or loss. It provides examples of accounting entries for different types of notes payable transactions.

    Copyright:

    © All Rights Reserved
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    of 27

    Chapter 8

    NOTE PAYABLE
    Intermediate Accounting 2
    JIMELYN H. EVANGELISTA, CPA, MBA
    COURSE OUTCOMES:
    the students should be able to:
    ✓ Define note payable.
    ✓ Understand the initial measurement
    and subsequent measurement of
    note payable.
    ✓ Apply proper accounting for note
    payable issued solely for cash,
    interest-bearing note payable and
    non-interest bearing note issued for
    property.
    PROMISSORY NOTE
    ➢ An unconditional promise in writing
    made by one person known to
    another, signed by the maker,
    engaging to pay on demand or at a
    fixed determinable future time a sum
    certain in money to order or to
    bearer.
    INITIAL MEASUREMENT
    ❑ Notes Payable not designated at FV
    through P/L shall be measured
    initially at fair value minus direct
    transaction costs.

    ❑However, if the note payable is


    irrevocably designated at FV trough
    P/L, the transaction costs are
    expensed immediately.
    SUBSEQUENT MEASUREMENT

    ❑ Amortized cost using the


    effective method

    ❑ At fair value, if the note is


    designated irrevocably as
    measured at FV through P/L
    AMORTIZED COST

    ❑ Amount at which the note payable is


    measured initially

    ❑ Minus principal payment

    ❑ Plus or minus the cumulative amortization


    using the effective interest method of any
    difference between the face amount and
    the present value of the note payable
    (discount or premium)
    NOTE ISSUED SOLELY FOR CASH
    On November 1, 20x0, an entity discounted its own
    note of P100,000 at 12% for one year.

    Present value = Cash Proceeds

    Cash 88,000
    Discount on note payable 12,000
    Note payable 100,000
    NOTE ISSUED SOLELY FOR CASH
    On December 31, 20x0, after 2 months, the discount is
    amortized as interest expense:

    Interest expense 2,000


    Discount on Note payable 2,000

    The straight-line method is used for


    simplicity. Besides the note payable has
    only a term of one year.
    INTEREST-BEARING NOTE ISSUED FOR PROPERTY

    Present value = Purchase price (or the FV)

    On April 1, 20x0, an entity acquired


    an equipment for P500,000 payable in 5
    annual equal installments every April 1
    of each year. Interest is 10% on the
    unpaid balance.
    INTEREST-BEARING NOTE
    20x0:
    Apr. 1 Equipment 500,000
    Note payable 500,000

    Dec. 31 Interest expense 37,500


    Interest payable 37,500
    20x1:
    Jan. 1 Interest payable 37,500
    Interest expense 37,500

    Apr. 1 Interest expense 50,000


    Note payable 100,000
    Cash 150,000
    Non-Interest Bearing Note Issued for Property

    Present value = Cash price

    On January 1, 20x0, an entity


    acquired an equipment with a cash price
    of P70,000 for P100,000, P20,000 down
    and signed a noninterest bearing note
    for the balance payable in 4 equal annual
    installments every December 31.
    Non-Interest Bearing Note Issued for Property
    Amortization Schedule:

    Note Fraction Amortization


    payable

    Yr. 1 80,000 8/20 12,000

    Yr. 2 60,000 6/20 9,000

    Yr. 3 40,000 4/20 6,000

    Yr. 4 20,000 2/20 3,000

    200,000 30,000
    Non-Interest Bearing Note
    20x0:
    Jan. 1 Equipment 70,000
    Discount on note payable 30,000
    Note payable 80,000
    Cash 20,000

    Dec. 31 Note payable 20,000


    Cash 20,000

    Interest expense 12,000


    Discount on note payable 12,000
    Non-Interest Bearing Note Issued for Property

    No Cash price
    On January 1, 20x0, an entity
    acquired an equipment for P100,000,
    P20,000 down and signed a noninterest
    bearing note for the balance payable in
    4 equal annual installments every
    December 31. The prevailing interest
    rate for this type of note was 10%.
    NON-INTEREST BEARING NOTE (Installment)

    Face of the Note 80,000


    Present Value of the Note
    (20,000 x 3.170) 63,400
    Discount on note payable 16,600

    PV of the note 63,400


    Cash down payment 20,000
    Cost Equipment 83,400
    Non-Interest Bearing Note
    Amortization Schedule: Effective Interest method

    Date Annual Interest Principal Present


    payment value
    Jan. 01, x0 63,400
    Dec. 31, x0 20,000 6,340 13,660 49,740
    Dec. 31, x1 20,000 4,974 15,026 34,714
    Dec. 31, x2 20,000 3,471 16,529 18,185
    Dec. 31, x3 20,000 1,815 18,185 -
    Non-Interest Bearing Note
    20x0:
    Jan. 1 Equipment 83,400
    Discount on note payable 16,600
    Note payable 80,000
    Cash 20,000

    Dec. 31 Note payable 20,000


    Cash 20,000

    Interest expense 6,340


    Discount on note payable 6,340
    FINANCIAL STATEMENT PRESENTATION
    On December 31, 20x0:
    Current Liability:
    Face of the Note payable 20,000
    Discount on Note payable 4,974
    Carrying amount – amortized cost 15,026

    ▪ Noncurrent Liability:

    Face of the Note payable 40,000


    Discount on Note payable 5,286
    Carrying amount – amortized cost 34,714
    NON-INTEREST BEARING NOTE ISSUED FOR PROPERTY

    Lump sum (No Cash price)


    On January 1, 20x0, an entity
    acquired an equipment for P100,000,
    P20,000 down and signed a noninterest
    bearing note for the balance which is
    due after four years. There was no
    established cash price for the
    equipment. The prevailing interest rate
    for this type of note was 10%.
    NON-INTEREST BEARING NOTE ISSUED FOR
    PROPERTY (Lumpsum)
    Face of the Note 80,000
    PV of the Note (80,000 x 0.683) 54,640
    Discount on note payable 25,360

    PV of the note 54,640


    Cash down payment 20,000
    Cost Equipment 74,640
    NON-INTEREST BEARING NOTES PAYABLE

    Amortization Schedule: Effective Interest method

    Date Interest Discount Present


    on note value
    payable
    Jan. 01, x0 25,360 54,640
    Dec. 31, x0 5,464 19,896 60,104
    Dec. 31, x1 6,010 13,886 66,114
    Dec. 31, x2 6,611 7,275 72,725
    Dec. 31, x3 7,275 0 80,000
    NON-INTEREST-BEARING NOTE
    20x0:
    Jan. 1 Equipment 74,640
    Discount on note payable 25,360
    Note payable 80,000
    Cash 20,000

    Dec. 31 Interest expense 5,464


    Discount on note payable 5,464
    20x3
    Interest expense 7,275
    Discount on note payable 7,275

    Note payable 80,000


    Cash 80,000
    DISCOUNTING
    NOTE PAYABLE WITHOUT RECOURSE
    (FAIR VALUE OPTION)

    PFRS 9 - at initial recognition, note payable may be


    irrevocably designated as at fair value through profit/ loss.
    The gain or loss should be accounted for as follows:

    ❑ The change in FV attributable to credit risk is


    recognized in other comprehensive income.
    Credit risk
    ➢ the risk that the issuer would cause a financial loss to
    the other party by failing to discharge the obligation.
    ➢ does not include market risk such as interest risk,
    currency risk and price risk.

    ❑ The remaining amount of the change in fair value is


    recognized in profit or loss
    NOTEDISCOUNTING WITHOUT
    PAYABLE (FAIR RECOURSE
    VALUE OPTION)

    ✓ amount recognized on OCI resulting from change in


    FV attributable to credit risk shall not be
    subsequently transferred to profit or loss

    ✓ However cumulative gain or loss recognized may be


    transferred within equity or retained earnings.

    ✓ Any transaction cost is recognized as outright


    expense.

    ✓ There is no amortization of discount and premium on


    note payable
    ✓ Interest is recognized using the nominal or stated
    interest rate.
    NOTE PAYABLE (FAIR VALUE OPTION)

    On January 1, 20x0, an entity borrowed from


    a bank P2,000,000 on a 12% 5-year interest
    bearing note. The entity received P2,000,000
    which is the fair value of the note. Transaction cost
    of P50,000 was paid by the entity. The fair value of
    the note payable was P1,750,000 on December
    31, 20x0. The entity elected irrevocably the fair
    value option for measuring the note payable. The
    change in FV comprised P25,000 attributable to
    credit risk and P225,000 attributable to interest
    risk.
    FAIR VALUE OPTION
    20x0:
    Jan. 1 Cash 2,000,000
    Note payable 2,000,000
    Transaction cost 50,000
    Cash 50,000
    Dec. 31 Interest expense 240,000
    Cash 240,000

    Note payable 250,000


    Gain from change in fair value 225,000
    Gain from credit risk – OCI 25,000
    NOTES PAYABLE

    end
    of
    Chapter 8

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