lOMoARcPSD|10519783

NOTE Payable

Intermediate Accounting 2 (University of Mindanao)

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 lOMoARcPSD|10519783

INTERMEDIATE ACCOUNTING VOL. 2 VALIX: CHAPTER 8 SUMMARY

NOTE PAYABLE
Initial measurement:
a. Not designated as FV Option (through Profit or Loss) = FV - Transaction Cost
b. Irrevocably designated at FVPL = FV only (Transaction Costs ate expensed
immediately)

Subsequent measurement:
a. At amortized cost using effective interest method
b. At FVPL

1. Note issued solely for cash ➢ Present Value = Cash Proceeds

Example:

“On November 1, 2020, an entity discounted its own note of 1,000,000 at 12% for 1
year.”

Step 1: Note Payable 1,000,000

Less: Discount (1M x 12%) ( 120,000)
Net Proceeds 880,000

Step 2: Entry
Nov. 1 Cash 880,000
Discount on Note payable 120,000
Note Payable 1,000,000

Step 3:
Dec. 31 Interest Expense 20,000 120,000 x 2/12 = 20,000
Discount on Note Payable 20,000 *Nov. 1 - Dec 31= 2 months

Step 4: Statement of Financial Position 12/31/2020

Current Liability:
Beg. bal of discount 120,000
Note payable 1,000,000 Amortized ( 20,000)
Discount on Note Payable ( 100,000) End. bal of discount 100,000
Carrying amount 900,000

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 lOMoARcPSD|10519783

INTERMEDIATE ACCOUNTING VOL. 2 VALIX: CHAPTER 8 SUMMARY

➢ Property = Purchase Price

2. Interest bearing note issued for property ➢ Purchase Price = Present Value (the
FV of the property)
Example:

“On Jan. 1, 2020, an entity acquired an equipment for ₱1,000,000 payable in 5 equal
annual installments every December 31 each year. interest is 10% on the unpaid
balance.”
Step 1:
2020
Jan. 1 Equipment 1,000,000
Note Payable 1,000,000
Step 2:
Dec. 31 Interest Expense (1Mx10%) 100,000
Note Payable 200,000
Cash 300,000
Step 3:
2021
Dec. 31 Interest Expense (NP bal. 800,000 x10%) 80,000
Note Payable 200,000
Cash 280,000

3. Noninterest bearing note issued for property ➢ Cash Price = Present Value of
note issued

NOTE : "No lender would part away with his money or property interest-free."
Cash Price
Less: Face of the Note
Imputed Interest

Example:

"On Jan. 1, 2020, an entity acquired an equipment with a cash price of ₱350,000 for
₱500,000, ₱100,000 down and the balance payable in 4 equal annual installments."

Step 1:
Cash Price 350,000
Jan. 1 Equipment 350,000 Less: Face of the Note (500,000)
Discount on Note Payable 150,000 Imputed Interest 150,000
Cash 100,000
Note Payable 400,000

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INTERMEDIATE ACCOUNTING VOL. 2 VALIX: CHAPTER 8 SUMMARY

Step 2:
Dec. 31 Notes payable 100,000
Cash 100,000
Step 3: Amortization Table:
Year Note Payable Fraction Amortization
2020 400,000 4/10 400,000/1,000,000 60,000
2021 300,000 3/10 300,000/1,000,000 45,000
2022 200,000 2/10 200,000/1,000,000 30,000
2023 100,000 1/10 100,000/1,000,000 15,000
Total 1,000,000 150,000

✓ When there is no cash price

Step 1:
➢ PV of Note payable without down payment:

➢ Cost of property = Present value of the notes payable

Annual installment x PV of an ordinary

annuity

➢ PV of Note payable with down payment:

➢ Cost of property = Down payment + Present value of the notes payable

a. Amount of notes payable - down
payment
b. a. /number of installment years
c. Effective rate x b

Step 2: Discount on notes payable = Face value - Present Value of notes payable
Step 3: Table of Amortization

Example:

“On January 1, 2020 an entity acquired an equipment for ₱1,000,000 payable in 5

equal annual installments on every December 31 of each year. The rate of 10% is
assumed to be the prevailing market rate of interest. The PV of an ordinary annuity of 1
for 5 years at 10% is 3.7908” → using basic calculator: 1.10 ÷ ÷ = (5 times) Grand Total

Step 1: Cost of property = 1M/5 x 3.7908

= 758,160

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INTERMEDIATE ACCOUNTING VOL. 2 VALIX: CHAPTER 8 SUMMARY

Step 2: Discount on Note Payable = 1,000,000 - 758,160

= 241,840
Step 3: Table of amortization

Date (a) (b) (a - b) Present Value

Payment Interest Principal
Jan 1, 2020 758,160
Dec 31, 2020 200,000 75,816 758,160 x 10% 124,184 633,976 758,160 – 124,184
Dec 31, 2021 200,000 63,398 136,602 497,374
Dec 31, 2022 200,000 49,737 150,263 347,111
Dec 31, 2023 200,000 34,711 165,289 181,822
Dec 31, 2024 200,000 18,178 200,000 – 181,822 181,822 0

✓ When note payable lump sum

Step 1:
➢ Cost of property = Down payment + Present value of the notes payable
a. Amount of note payable - down
payment
b. a x Effective rate

Step 2: Discount on notes payable (imputed interest) = FV of note - Present value of note
Step 3: Table of amortization

Example:
“On January 1, 2020, an entity acquired an equipment for ₱1,000,000. The entity paid
100,000 down and signed a non-interest bearing note for the balance which is due after
three years on January 1, 2023.
There was no established cash price for the equipment. The prevailing interest rate for
this type of note is 10%. The present value of 1 for 3 periods is .7513” →using basic
calculator: 1.10 ÷ ÷ = (3 times)
Step 1:
a. 1,000,000 - 100,000 down = 900,000
b. 900,000 x .7513 = 676,179 PV
Cost of equipment = 100,000 down + 676,179 PV
= 776,170

Step 2: Discount on Note Payable = face 900,000 - PV 676,170

= 223,830

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INTERMEDIATE ACCOUNTING VOL. 2 VALIX: CHAPTER 8 SUMMARY

Step 3: Table of amortization

Date Interest Expense Discount on note payable Present Value
Jan. 1, 2020 223,830 676,170
Dec. 31, 2020 67,617 676,170 x 10% 156,213 223,830 – 67,617 743,787 676,170 + 67,617
Dec. 31, 2021 74,379 81,834 818,166
Dec. 31, 2022 81,834 900,000 – 818,166 - 900,000

4. FV option of measuring notes payable

FVPL shall be accounted for as:

1. Change in FV attributable to the credit risk - OCI
2. Change in FV attributable to the interest risk (the remaining amount) – PL

NOTE: Transaction cost is recognized as outright expense

No amortization of discount/ premium

Gain from changes in FV = FV lower than initial measurement (decrease in FV)

Loss from changes in FV = FV higher than initial measurement (increase in FV)

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