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    Accounting For Notes Payable

    Uploaded by

    Liza Mae Miranda
    This document provides present value (PV) formulas and discount formulas for various types of notes. It includes short term and long term notes that are interest bearing or non-interest bearing. It also provides amortization and interest expense formulas. An example is then provided to illustrate the accounting entries for a long term note where equipment was purchased partly in cash and partly via a note. An amortization table is presented to show the annual interest expense, interest paid, discount amortization and change in principal for the note over its term.

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    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd

    Accounting For Notes Payable

    Uploaded by

    Liza Mae Miranda
    19 views10 pages
    This document provides present value (PV) formulas and discount formulas for various types of notes. It includes short term and long term notes that are interest bearing or non-interest bearing. It also provides amortization and interest expense formulas. An example is then provided to illustrate the accounting entries for a long term note where equipment was purchased partly in cash and partly via a note. An amortization table is presented to show the annual interest expense, interest paid, discount amortization and change in principal for the note over its term.

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    Accounting for Notes Payable

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    This document provides present value (PV) formulas and discount formulas for various types of notes. It includes short term and long term notes that are interest bearing or non-interest bearing. It also provides amortization and interest expense formulas. An example is then provided to illustrate the accounting entries for a long term note where equipment was purchased partly in cash and partly via a note. An amortization table is presented to show the annual interest expense, interest paid, discount amortization and change in principal for the note over its term.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    19 views10 pages

    Accounting For Notes Payable

    Uploaded by

    Liza Mae Miranda
    This document provides present value (PV) formulas and discount formulas for various types of notes. It includes short term and long term notes that are interest bearing or non-interest bearing. It also provides amortization and interest expense formulas. An example is then provided to illustrate the accounting entries for a long term note where equipment was purchased partly in cash and partly via a note. An amortization table is presented to show the annual interest expense, interest paid, discount amortization and change in principal for the note over its term.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Download as xlsx, pdf, or txt
    of 10

    TYPE OF NOTES PV FORMULA DISCOUNT FORMULA

    (1) short-term; non-


    interest bearing; face PV=cash proceeds or face value none
    value=cash proceeds

    (2) short-term;
    PV=face value none
    interest bearing

    (3) short-term; non-


    interest bearing; face
    value > cash PV = cash proceeds Face Value - Cash Proceeds
    proceeds;

    (4) short-term; non-


    interest bearing; face
    value > cash PV = cash proceeds Face value - cash proceeds
    proceeds; payable on
    installment

    (5) long-term; interest


    bearing; interest rate
    is same as prevailing PV = face value
    none
    market rate

    (6) long-term, non-


    interest bearing; PV = cash proceeds Face value - Cash proceeds
    issued for cash

    (7) long-term; non-


    interest bearing;
    issued for non-cash PV = cash price Face value - Cash price
    asset; cash price is
    given

    (8) long-term; non-


    interest bearing;
    issued for non-cash PV = Periodic payment x PVf of
    Face Value - Present value
    asset; no cash price annuity of P1
    given; payable in
    installments

    (9) long-term; non-


    interest bearing;
    issued for non-cash PV = lumpsum payment x PVF of
    Face value - Present value
    asset; no cash price is P1
    given; payable in
    lumpsum
    (10) long-term; non-
    interest bearing;
    issued for non-cash
    asset; no cash price PV = periodic payment x PVF of
    Face value - Present Value
    given; payable in annuity due
    installments with fist
    payment given in
    advance

    (11) long-term;
    interest bearing;
    interest rate is
    substantially lower PV = (face value x PVF of P1) +
    than the prevailing (periodic interest payment x PVF Face value - Present Value
    market rate; principal of annuity of P1)
    is payable in
    lumpsum; interest is
    payable periodically

    (12) long-term; non-


    interest bearing; PV = total of the PV of each
    issued for non-cash scheduled payment; PV of each
    Face value - Present value
    asset; no cash price scheduled payment = scheduled
    given; periodic payment x PVF of P1
    payment is unequal
    DISCOUNT AMORTIZATION
    INTEREST EXPENSE, END OF YEAR 1
    METHOD

    none none

    none I=Pxrxt

    Straight-line method I = Discount/term of note x time

    I = (outstanding balance, Yr1/Total of


    Outstanding balance method
    Outstanding Balances) x Discount

    none I=Pxrxt

    effective interest method I = Pv x eir x t

    effective interest method I = Pv x eir x t

    effective interest method I = Pv x eir x t

    effective interest method I = Pv x eir x t


    effective interest method I = PV(net of first payment) x eir x t

    effective interest method I = Pv x eir x t

    effective interest method I = Pv x eir x t


    On September 1, 20x6, the company purchased an equipment by paying P1,000,000 cash and issuing
    a P5,000,000, 8%, promissory note, P1,000,000 of which matures annually starting September 1, 20x7.
    The equipment can be purchased on a cash basis for P5,534,968.

    The prevailing market rate of interest for this type of note is 12%.
    20x6
    9/1/20x6 Equipment 5,534,968
    Discount on Notes Payable 465,032
    Cash 1,000,000
    Notes Payable 5,000,000

    Amortization Table Amortization of Discount on NP increases the Carrying Amount (PV


    Date Interest Interest Amortization Principal PV
    Expense Paid Payment
    9/1/20x6 4,534,968
    9/1/20x6 9/1/20x7 544,196 400,000 144,196 1,000,000 3,679,164
    9/1/20x7 9/1/20x8 441,500 320,000 121,500 1,000,000 2,800,664
    9/1/20x8 9/1/20x9 336,080 240,000 96,080 1,000,000 1,896,744
    9/1/20x9 9/1/20x0 227,609 160,000 67,609 1,000,000 964,353
    9/1/20x0 9/1/20x1 115,647 80,000 35,647 1,000,000 0

    Dec 31 Interest Expense 133,333


    Interest Payable 133,333

    Interest Expense 48,065


    Discount on Notes Payable 48,065

    How would you present your notes payable on the statement of financial position
    as at December 31, 20x6?
    Current Liabilities
    Currently Maturing Portion of 8% Notes Payable 1,000,000
    Less: Unamortized Discount 96,131
    903,869
    NonCurrent Liabilities
    8% Notes Payable 4,000,000
    Less: Unamortized Discount 320,836
    3,679,164

    Obtained a loan from the bank by issuing a non-interest bearing note for P3,000,000 which will be
    paid in total after 4 years. The cash proceeds from this issuance amounts to P2,500,000.
    9/1/20x6 Cash 2,500,000
    Discount on Notes Payable 500,000
    Notes Payable 3,000,000

    using effective interest rate in amortizing discount:


    what is your effective interest rate?
    amortization table
    Date Amortization Discount PV Dec 31, 20x6 Interest Expense
    9/1/20x6 500,000.00 2,500,000.00 Interest Payable
    9/1/20x7 116,500.00 383,500.00 2,616,500.00 (116,500 x 4/12)
    9/1/20x8 121,928.90 261,571.10 2,738,428.90
    9/1/20x9 127,610.79 133,960.31 2,866,039.69
    9/1/20x0 133,960.31 - 3,000,000.00 3,000,000 Notes Payable
    133,557.45 402.86 Cash
    effective interest rate is at 4.66% 133,960

    On September 1, 20x6, the company acquired an equipment by issuing a non-interest bearing, P5million
    notes payable which will be paid at the rate of P1,000,000 per year starting September 1, 20x8.
    The prevailing market rate of interest for this type of note is 12%.

    What is the present value of the note?

    date payment pvf PV


    9/1/20x6
    9/1/20x7 0.8929 -
    9/1/20x8 1,000,000 0.7972 797,200.00
    9/1/20x9 1,000,000 0.7118 711,800.00
    9/1/20x0 1,000,000 0.6355 635,500.00
    9/1/20x1 1,000,000 0.5674 567,400.00
    9/1/2022 1,000,000 0.5066 506,600.00
    5,000,000.00 3,218,500.00 1,781,500

    9/1/20x6 Equipment 3,218,500.00 Dec 31 20x6 Interest Expense


    Discount on N/P 1,781,500.00 Discount on Notes Payable
    Notes Payable 5,000,000.00

    Date Interest Expens Discount Bal Principal PV


    9/1/20x6 1,781,500.00 3,218,500.00
    9/1/20x7 386,220.00 1,395,280.00 3,604,720.00
    9/1/20x8 432,566.40 962,713.60 1,000,000 3,037,286.40
    9/1/20x9 364,474.37 598,239.23 1,000,000 2,401,760.77
    9/1/20x0 288,211.29 310,027.94 1,000,000 1,689,972.06
    9/1/20x1 202,796.65 107,231.29 1,000,000 892,768.71
    9/1/2022 107,231.29 - 1,000,000 -
    4,534,968
    465,032

    creases the Carrying Amount (PV) of NP.

    4,583,033 = Face Value 5,000,000 Discount on NP upon purchase


    Unamortized 416,967 Amortization - 12/31/20x6
    4,583,033.39 Unamortized Discount

    Discount?
    EIR?
    nterest Expense 38,833.33
    Interest Payable 38,833.33
    116,500 x 4/12)

    Notes Payable 3,000,000


    3,000,000

    nterest Expense 128,740.00


    Discount on Notes Payable 128,740.00
    on NP upon purchase 465,032
    on - 12/31/20x6 48,065
    ed Discount 416,967
    interest 12%
    9/1/2016 Balance 8% total payment pvf of 1 PV
    9/1/2016 9/1/2017 5,000,000 400,000.00 1,400,000 0.8929 1,250,060.00
    9/1/2017 9/1/2018 4,000,000 320,000.00 1,320,000 0.7972 1,052,304.00
    9/1/2018 9/1/2019 3,000,000 240,000.00 1,240,000 0.7118 882,632.00
    9/1/2019 9/1/2020 2,000,000 160,000.00 1,160,000 0.6355 737,180.00
    9/1/2020 9/1/2021 1,000,000 80,000.00 1,080,000 0.5674 612,792.00
    unequal 4,534,968.00
    1,000,000
    Cash Price 5,534,968.00

    interest 8%
    9/1/2016 8% total payment pvf of 1 PV
    9/1/2016 9/1/2017 5,000,000 400,000.00 1,400,000 0.9259 1,296,260.00
    9/1/2017 9/1/2018 4,000,000 320,000.00 1,320,000 0.8573 1,131,636.00
    9/1/2018 9/1/2019 3,000,000 240,000.00 1,240,000 0.7938 984,312.00
    9/1/2019 9/1/2020 2,000,000 160,000.00 1,160,000 0.735 852,600.00
    9/1/2020 9/1/2021 1,000,000 80,000.00 1,080,000 0.6806 735,048.00
    4,999,856.00
    1,000,000
    PV 5,999,856.00
    Cash Price 6,000,000
    144.00

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