Intermediate Accounting 2

Homework
Note Payable (Chapter 8)

Chapter 8

1. What is a promissory note?

a. It is an unconditional promise in writing made by one person to another, signed by the
maker, engaging to pay on demand or at a fixed or determinable future time a sum
certain in money or order or to bearer.
2. Explain the initial and subsequent measurement of note payable.
a. Initial measurement the fair value of the note payable is equal to the present value of
the future cash payment to settle the note payable using the market rate of interest.
b. Subsequent measurement can be measured at:
i. Amortized cost using EIM
ii. At fair value through profit or loss if the note payable is designated irrevocably
as measured at fair value through profit or loss.
3. Explain the amortized cost of notes payable.
a. Amortized cost is the amount which the note is measured initially:
i. Minus principal repayment
ii. Plus or minus the cumulative amortization using the effective interest method
of any difference between the face amount and present value of the note
payable.
4. What is the present value of a note payable?
a. Note issued solely for cash
i. Present value is equal to the cash proceeds. The straight line method is used in
amortizing the discount on note payable for simplicity. Besides, the note
payable has only a term of one year.
b. Interest bearing note issued for property
i. When a property or noncash asset is acquired by issuing a promissory note
which is interest bearing, the property or asset is recorded at the purchase
price.
c. Noninterest bearing note issued for property
i. The property is recorded at the cash price of the property. The cash price is
assumed to be present value of the note issued. The cash price is assumed to be
the present value of the note issued.
5. Explain the fair value option of measuring the note payable.
a. At initial recognition a note payable may be irrevocably designated as at fair value
though profit or loss.