Learning Objectives:

1. Prepare entries for note payable irrevocably designated at fair value through profit or loss.
2. Compute for the net gain or loss from change in fair value of the note payable.
3. Present the change in fair value in the financial statements.
4. Account for loans payable.
4. Solve problems related to the topic.

Note payable irrevocably designated at fair value through profit or loss

Accounting for gain or loss on financial liability designated at fair value through profit or loss:
1. change in fair value attributable to the credit risk - reported at OCI. (shall not be transferred to
P/L but the cumulative amount may be transferred within equity or retained
earnings)
- is the risk that the issuer of the liability would cause a financial
loss to the other party by failing to discharge the liability
- does not include market risk: interest risk, currency risk, price risk
2. the remaining amount of the change in fair value is recognized in P/L

Transaction cost is recognized as outright expense.

No amortization of discount and premium on note payable.

Problem:
On January 1, 2019 Romeo Company borrowed ₱500,000, 8% noninterest-bearing note due in 4
years. The present value of the note on the date of issuance was ₱367,500. The entity elected
irrevocably the fair value option in measuring the note payable. On December 31, 2019, the fair
value of the note is ₱408,150.
Required: Prepare journal entries.

Requirement 1:

2019
Jan. 1 Cash ₱500,000
Note payable ₱367,500
Gain from change in fair value 132,500
Dec. 31 Interest expense 40,000
Cash 40,000
(₱500,000 x 8%)

31 Loss from change in fair value 40,650

Note payable 40,650
(₱408,150 - ₱367,500)

Gain from change in fair value ₱ 132,500

Loss from change in fair value 40,650
Net gain from change in fair value ₱ 91,850
Questions:
1. What is the carrying amount of the note payable on December 31, 2019? Ans: ₱408,150
2. What amount should be reported as interest expense for 2019? Ans: ₱40,000
3. What is the net gain from change in fair value to be recognized in 2019? Ans: ₱91,850
4. What amount of discount on note payable be presented on December 31, 2019? Ans: ₱0

*If the fair value option is elected for reporting a financial liability, the liability is reported at fair
value at every year-end with resulting changes in fair value included in P/L. However, if the change
in fair value is attributable to credit risk of the financial liability, the gain or loss is recognized in
OCI.

Accounting for Loan Payable

Accounting for loan payables, such as bank loans, involves taking account of receipt of
loan, re-payment of loan principal and interest expense.

Loan payable – is similar to note payable.

- can be used to connote bank loans and similar types of financing.
- involves transaction costs.

Transaction costs – are incremental costs that are directly attributable to the acquisition,
issue or disposal of a financial asset or financial liability.
- include fees and commissions paid to agents, advisers, levies by
regulatory agencies and securities exchanges and transfer taxes and
duties.
- do not include debt premiums or discounts, financing costs or internal
administrative or holding costs.
Origination fees – is a fee charged by a lender to cover the costs of processing the loan, such as
evaluating the borrower’s financial condition, etc.
- are deducted to measure the carrying amount of the loan payable.
- are subsequently amortized using the effective interest method.

Illustration: On January 1, 2020, ABC Co. borrowed ₱1,000,000 from a bank. The bank charged a
3% loan origination fee. The principal is due on January 1, 2023 but 10% interest is due
annually starting January 1, 2021.
Required: 1. Compute for the initial measurement/carrying amount of the loan payable at January
1, 2021
Answer: Principal amount ₱1,000,000
Less: Origination fee (₱1M x 3%) 30,000
Carrying amount ₱ 970,000*
* when the carrying amount of the financial instrument is less than its face amount,
there is discount. It means also that the effective rate is higher than the
nominal rate. On the other hand, when the carrying amount of the financial
instrument is greater than its face amount, there is premium and the
effective rate is lower than the nominal rate.

2. Prepare the discount amortization table

Interest Interest Discount Present
Date payments Expense amortization value
(₱1M x 10%) (e x 11.2357%*) (c-b) (e + d)
(a) (b) (c) (d) (e)
Jan. 1, 2020 ₱ 970,000
Jan. 1, 2021 ₱100,000 ₱ 108,986 ₱ 8,986 978,986
Jan. 1, 2022 100,000 109,996 9,996 988,982
Jan. 1, 2023 100,000 111,119 11,119 1,000,000
*the effective rate - 11.2357% obtained by trial and error method. Since there is a discount, the
effective rate is higher than the nominal rate of 10%.

Entries:
2020
Jan. 1 Cash ₱970,000
Discount on loan payable 30,000
Loan payable ₱1,000,000

Dec. 31 Interest expense 108,986

Interest payable 100,000
Discount on loan payable 8,986
2021
Jan. 1 Interest payable 100,000
Cash 100,000

Dec. 31 Interest expense 109,996

Interest payable 100,000
Discount on loan payable 9,996

2022
Jan. 1 Interest payable 100,000
Cash 100,000

Dec. 31 Interest expense 111,119

Interest payable 100,000
Discount on loan payable 11,119

2023
Jan. 1 Interest payable 100,000
Loan payable 1,000,000
Cash 1,100,000