1.

Explain the initial measurement of note payable

 PFRS 9, paragraph 5.1.1, provides that a note payable shall be measured initially at fair value minus
transaction costs that are directly attributable to the issue of the note payable.
 In other words, transaction costs are included in the measurement of note payable
 However, if the note payable is irrevocably designated at fair value through profit or loss, the
transaction
costs are expensed immediately

2. Explain the subsequent measurement of note payable

 PFRS 9, paragraph 5.3.1, provides that after initial recognition, a note payable shall be measured
either:
a. At amortized cost using the effective interest method
b. At fair value through profit or loss
 PFRS 9, paragraph 4.2.2, provides that at initial recognition a note payable may be irrevocably
designated as at fair value through profit or loss
 Under the fair value option, the note payable shall be measured initially at fair value and remeasured
at
every year-end at fair value and any changes in fair value are recognized in profit or loss
 Interest expense is recognized using the nominal or stated interest rate and not the effective interest
rate.
 interest

3. What is meant by debt restructuring?

 Debt restructuring is a situation where the creditor, for economic or legal reasons related to the
debtor’s
financial difficulties, grants to the debtor concession that would not otherwise be granted in a normal
business relationship
 The concession either stems from an agreement between the creditor and debtor, or is imposed by
law or a court
 The objective of the creditor in a debt restructuring is to make the best of a bad situation or maximize
recovery of investment
 Thus, the creditor usually sustains an accounting loss on debt restructuring and the debtor realizes an
accounting gain
 The common forms of debt restructuring are:
a. Asset swap
b. Equity swap
c. Modification of terms

4. Explain an asset swap

 Asset swap is the transfer of any asset such as real estate, inventory or investment by the debtor to
the creditor in full settlement of an obligation
 Under PFRS 9, paragraph 3.3.1 and 3.3.3, asset swap is treated as a derecognition of a financial liability
or extinguishment of an obligation
 The difference between the carrying amount of the financial liability and the consideration given shall
be recognized in profit or loss

5. Explain an equity swap

 An equity swap is a transaction whereby a debtor and creditor may renegotiate the terms of a
financial liability with the result that the liability is fully or partially extinguished by the debtor issuing
equity instruments to the creditor
 Simply stated, equity swap is the issuance of share capital by the debtor to the creditor in full or
partial payment of an obligation
 This accounting issue of “extinguishment of a financial liability by issuing instruments” is now well-
settled under IFRIC 19
 The equity instruments issued to extinguish a financial liability shall be measured at the following
amounts in the order of priority
a. Fair value of equity instruments issued
b. Fair value of liability extinguished
c. Carrying amount of liability extinguished
 The difference between the carrying amount of the financial liability extinguished and the “initial
measurement” of the equity instruments issued shall be recognized in profit or loss
 Such gain or loss on extinguishment shall be disclosed as a separate line item in the income statement

Problem 1
Ontario Company, a natural energy supplier, borrowed 8,000,000 cash on November 1, 2020 to fund a
geological survey. The loan was granted by United Bank under short-term credit line. Ontario issued a 9-
month, 12% promissory note with interest payable at maturity. The fiscal period is the calendar year.

Required:
1. Prepare the journal entry for the issuance of the note payable by Ontario Company
2. Prepare the appropriate adjusting entry for the note payable on December 31, 2020
3. Prepare the journal entry for the payment of the note payable at maturity
Answer:
1. Cash 8,000,000
Note payable 8,000,000

2. Interest expense (8,000,000 x 12% x 2/12) 160,000

Interest payable 160,000

3. Interest expense (8,000,000 x 12% x 7/12) 560,000

Interest payable 160,000
Note payable 8,000,000
Cash 8,720,000

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

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
Discount on Note Payable 20,000

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

Current Liability:
Note payable 1,000,000
Discount on Note Payable (100,000)→
Carrying amount 900,000

2. Interest bearing note issued for 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

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:
Jan. 1 Equipment 350,000
Discount on Note Payable 150,000
Cash 100,000
Note Payable 400,000

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:

➢ PV of Note payable with down payment:

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

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

= 241,840

Step 3: Table of amortization

✓ When note payable lump sum

Step 1:

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
Step 3: Table of amortization

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