Chapter 8 INTEREST BEARING NOTE FOR PROPERTY

NOTE PAYABLE
PV=Purchase Price of Asset

Promissory Note – unconditional promise in 1. Acquisition of Asset w/ NP

writing made by one person to another, signed by Equipment (Asset) xx
the maker, engaging to pay on demand or at a fixed Note Payable xx
or determinable future time a sum certain in money
to order or to bearer 2. Payment of Installment and INTEREST
for the year
INITIAL INSTRUMENT Interest Expense (NP x %) xx
Note Payable xx
NP not designated at FV through PL – measured Cash xx
initially @ FV – TRANSACTION COST (directly
attributable to issue cost of NP) 3. Payment of 2nd Installment and
INTEREST for the year
IF NP is irrevocably designated at FV through PL (*NP - 1st payment on installment)
TRANSACTION COST is expensed Interest Expense (*NP x %) xx
FV=PV of future cash payment to settle the NP Note Payable xx
Cash xx
SUBSEQUENT MEASUREMENT
1. Amortized Cost using EIM NONINTEREST BEARING NP ISSUED FOR
Note Payable xx PROPERTY
Less: Principal Repayment (xx)
Add/Less: Cumulative Amort of PV = Cash Price of Property
Discount/Premium on NP xx Cash Price – Face of the Note Issued
Note Payable xx =Imputed interest
1. Acquisition
2. FV through PL IF NP is irrevocably Equipment (Asset) xx
designated at FV through PL Discount on NP (Imputed Interest) xx
Cash (Down payment) xx
NOTE ISSUED SOLELY FOR CASH
PV = Cash Proceeds 2. Payment of Annual Installment
Straight Line Method used in amortization of Notes Payable xx
discount/premium on BP Cash xx

3. Amortization of Discount
Note Payable xx
Interest Expense xx
Less: Discount (NP x %) xx**
Discount on NP xx
Net Proceeds xx*
Amortization of Discount (Interest Expense)
Journal Entry Outstanding Method
Cash xx* Note
Discount xx** Year Fraction Amortization
Payable
Note Payable xx
Total= Disc.
Amortization
Interest Expense xx
Discount on NP xx
(Discount x 𝑥⁄12)

Note Payable xx
Less: Discount (Remaining) xx
CA of NP xx
 NO CASH PRICE FAIR VALUE OPTION OF MEASURING NP
PV of Annual Installments + Disc = PV NP irrevocably designated as at FV through PL
1. Acquisition of Asset w/ NP Gain/Loss – shall be accounted for as:
Equipment (PV of Annual Installments) xx
Discount on NP (NP-PV) 1. The change in FV attributable to credit risk
Note Payable xx is recognized in OCI
 NOT transferred to P/L
1. Payment of First Installment
Notes Payable xx Credit Risk – risk that the issuer of the liability
Cash xx would cause a financial loss to the other party
by failing to discharge the obligation
2. Amortization of Discount - does not include market risk
Interest Expense xx (Interest risk, currency risk and price risk)
Discount on NP xx
2. The remaining amount of the change in FV
Amortization of Discount (Interest Expense) is recognized as profit/loss
Effective Interest Method
Payment Interest Principal PV Cumulative gain/loss – transferred within equity or
Date RETAINED EARNINGS
(A) (B) (C) (D)
DX% A-B D1-C NO Amortization of Disc/Premium on NP

NONINTEREST BEARING NP LUMP SUM Carrying Amount of NP xx

Less: Fair Value of NP xx
Down payment xx Decrease in Fair Value of Liability xx**
Present Value of NP (NP x PV of 1) xx (GAIN) – recognized in P/L
Cost of Equipment xx*
Journal Entry (Beg.)
Face Value of NP xx Cash xx
Less: Present Value of NP xx Note Payable xx
Imputed Interest xx**
Transaction Cost (given) xx
Journal Entry Cash xx
Equipment* xx*
Discount on NP xx** End of Year
Note Payable xx Interest Expense xx
Cash (Down Payment) xx Cash (CA of NP x %) xx

Amortization Note Payable xx

Interest Expense xx Gain from Change in Fair Value xx**
Discount on NP xx Gain from credit risk-OCI (given) xx

Full Payment on Due Date Full Payment on Due Date

Notes Payable xx Notes Payable xx
Cash xx Cash xx

Amortization of Discount (Interest Expense)

Effective Interest Method Gain from Change in Fair Value – recognized in P/L
Interest Discount
PV pf NP Gain from credit risk – Other Comprehensive
Date Expense on NP Income
(c)
(A) (B)
xx** xx
Cx% B-A C+B