Professional Documents
Culture Documents
Chapter 2
Notes Payable
PROBLEM 1: TRUE OR FALSE
1. FALSE – interest payable = face amount x nominal rate
2. TRUE
(1,241,843 x 110% x 110%) = 1,502,630 carrying amount on Dec.
31, 20x2
2M face amount - 1,502,630 = 497,370
3. TRUE
5. TRUE
10. TRUE
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6. C
7. C
8. D
9. B
1st note: 6,000 x 18% = 1,080 interest expense;
2nd note: (7,080 ÷ 118%) x 18% = 1,080 interest expense
10. B
Concept: Pre-acquisition accrued interest
When interest has accrued before the issuance of an interest-
bearing payable, the subsequent payment of interest is allocated
between the pre-acquisition and post-acquisition periods. Only
the portion pertaining to the post-acquisition period is recognized
as interest expense.
PROBLEM 3: EXERCISES
1. Solution:
Cash flows 2,000,000
PV of 1 @16%, n=3 0.64066
Present value - 1/1/x1 1,281,320
Interest Present
Date expense Discount value
1/1/x1 718,680 1,281,320
12/31/x1 205,011 513,669 1,486,331
12/31/x2 237,813 275,856 1,724,144
12/31/x3 275,856* 0 2,000,000
* Squeezed to eliminate difference due to rounding-off
1/1/x1
Equipment 1,281,320
Discount on notes payable 718,680
Notes payable 2,000,000
12/31/x1
Interest expense 205,011
Discount on notes payable 205,011
12/31/x2
Interest expense 237,813
Discount on notes payable 237,813
12/31/x3
Interest expense 275,856
Discount on notes payable 275,856
2. Solutions:
Requirement (a):
Cash flows 1,000,000
PV ord. annuity @18%, n=3 2.17427
Present value - 1/1/x1 2,174,270
Requirement (b):
Future cash payments (1M x 2 yrs.) 2,000,000
Carrying amount, 12/31/x1 1,565,639
Discount on note payable, 12/31/x1 434,361
Current portion:
Notes payable (1,000,000 due in 20x2) ₱1,000,000
(281,815
Discount on notes payable (1M – 718,185 current portion) )
Notes payable, net (presented in current liabilities) 718,185
Noncurrent portion:
1,000,00
Notes payable (1,000,000 due in 20x3) 0
Discount on notes payable (1M – 847,454 noncurrent (152,546
portion) )
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Requirement (c):
1/1/x1
Equipment 2,174,270
Discount on notes payable 825,730
Notes payable 3,000,000
12/31/x1
Notes payable 1,000,000
Interest expense 391,369
Discount on notes payable 391,369
Cash 1,000,000
12/31/x2
Notes payable 1,000,000
Interest expense 281,815
Discount on notes payable 281,815
Cash 1,000,000
12/31/x3
Notes payable 1,000,000
Interest expense 152,546
Discount on notes payable 152,546
Cash 1,000,000
3. Solutions:
PV of note = (2M ÷ 4) x PV of an annuity due of P1 @12%, n=4
PV of note = 1,700,916
Requirement (a):
Jan. 1, Vehicle 1,900,91
20x1
Discount on notes payable 6
Cash 299,084 200,000
Notes payable 2,000,00
0
Jan. 1, Notes payable 500,000
20x1
Cash 500,000
Dec. 31, Interest expense 144,110
20x1
Discount on notes payable 144,110
Jan. 1, Notes payable 500,000
20x2
Cash 500,000
Dec. 31, Interest expense 101,403
20x2
Discount on notes payable 101,403
Jan. 1, Notes payable 500,000
20x3
Cash 500,000
Dec. 31, Interest expense 53,571
20x3
Discount on notes payable 53,571
Jan. 1, Notes payable 500,000
20x4
Cash 500,000
Requirement (b):
Interest expense in 20x2 = 101,403
Requirement (c):
Carrying amt. on 1/1/x2 845,026
Add back: Payment on 1/1/x2 500,000
1,345,02
Carrying amt. on 12/31/x1
6
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4. Solution:
Face amount (1) (400,000 x 4) = 1,600,000
Discount on N/P on initial recognition (2) (1.6M – 1,119,272) = 480,728
Effective interest rate (3) (179,084 ÷ 1,119,272) = 16%
Term of the note (in years) (4) 4 years
5. Solution:
First step: Place the given information on the amortization table:
Amortizatio
Date Payments Interest expense n Present value
1/1/x1 911,205
12/31/x1 300,000
12/31/x2 300,000 86,466 213,534 507,016
12/31/x3 300,000
12/31/x4 300,000
2. B
Date Interest expense Discount Present value
1/1/x1 2,141,234 2,858,766
12/31/x1 428,815 1,712,419 3,287,581
12/31/x2 493,137 1,219,282 3,780,718
12/31/x3 567,108 652,174 4,347,826
12/31/x4 652,174 (0) 5,000,000
Shortcut:
F (5M x PV of 1 @15%, n=4) = 2,858,766;
F 2,858,766 x 115% x 115% = 3,780,718;
F 5M – 3,708,718 = 1,219,282
3. B
Shortcut: 418,250 - the cost of the annuity purchased.
Longcut: Reconciliation for the shortcut above
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12/31/2000
Investment (annuity product) 418,250
Cash 418,250
(a)
Payment due on 1/2/2001 50,000
Cost of annuity purchased 418,250
Contest prize expense (equal to carrying amount of
468,250
note)
1/2/2001
Notes payable 50,000
Cash 50,000
4. C
Shortcut: 468,250 the total carrying amount of the note or
(418,250 annuity + 50,000 payment = 468,250)
Longcut: see reconciliation above
5. A
PV factors
@ 6%, n= Present
Future cash flows 6 value
4,000,00
Principal 0 0.70496 a 2,819,840
Semiannual int. (4M x 1.5%) 60,000 4.91732 b 295,039
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Total 3,114,879
a
(PV of ₱1 @6%, n=6)
b
(PV of ordinary annuity of ₱1 @6%, n=6
6. A
Cash flow 20,000
PV of annuity due of 1 @11%, n=8 5.712
PV of note on Dec. 30, 20x6 114,240
Less: First installment on Dec. 31, 20x6 (20,000)
PV of note on Dec. 31, 20x6 94,240
7. D
Future cash flows x (PV of ordinary annuity of 1 @1%, n=300) =
14,000,000
Future cash flows x 94.9465512548 = 14,000,000
Future cash flows = 14,000,000 ÷ 94.9465512548
Future cash flows (monthly payment) = ₱147,451.38
8. A
Monthly amortization 147,451.38
Multiply by: (25 yrs. x 12 months) 300
Total payments 44,235,414
Cash selling price (14,000,000)
Total interest expense 30,235,414
9. C
Loan payable 4,000,000
Transaction costs (4M x 11.19%) (447,600)
Carrying amount - 1/1/x1 3,552,400
Plus points to the learner who went the extra mile and
placed a description for the table.
P a g e | 12
1. Solution:
Cash flows 1,600,000
PV of 1 @17%, n=3 0.62437
P a g e | 13
1/1/x1
Land 998,992
Discount on notes payable 601,008
Notes payable 1,600,000
12/31/x1
Interest expense 169,829
Discount on notes payable 169,829
12/31/x2
Interest expense 198,700
Discount on notes payable 198,700
12/31/x3
Interest expense 232,479
Discount on notes payable 232,479
2. Solution:
Requirement (a):
Cash flows 400,000
PV ord. annuity @17%, 2.209585
P a g e | 14
n=3
Present value - 1/1/x1 883,834
1/1/x1
Land 883,834
Discount on notes payable 316,166
Notes payable 1,200,000
12/31/x1
Notes payable 400,000
Interest expense 150,252
Discount on notes payable 150,252
Cash 400,000
12/31/x2
Notes payable 400,000
Interest expense 107,795
Discount on notes payable 107,795
Cash 400,000
12/31/x3
Notes payable 400,000
Interest expense 58,119
Discount on notes payable 58,119
Cash 400,000
Requirement (b):
Current portion:
P a g e | 15
3. Solutions:
Initial measurement:
(1.2M ÷ 3) = 400,000;
400,000 x PV of an annuity due of ₱1 @10%, n=3 = 1,094,215
Requirement (a):
Payment Interest Amortizatio Present
Date s expense n value
1/1/x1 1,094,215
1/1/x1 400,000 - 400,000 694,215
1/1/x2 400,000 69,422 330,578 363,637
1/1/x3 400,000 36,363 363,637 (0)
Requirement (b):
69,422 – see table above.
Requirement (c):
363,63
Carrying amt. on 1/1/x2
7
400,00
Add back: Payment on 1/1/x2
0
763,63
Carrying amt. on 12/31/x1
7
P a g e | 16
4. Solutions:
Requirement (a):
Loan payable 3,000,000
Transaction costs (3M x
4.8037%) (144,111)
Carrying amount - 1/1/x1 2,855,889
Requirement (b):
Trial and error:
Working formula:
(Principal: 3,000,000 x PV of 1 @ x%, n=3) + (Interest: 300,000 x PV
ordinary annuity @ x%, n=3) = 2,855,889
Requirement (c):
Payment Interest Amortizatio Present
Date s expense n value
1/1/x1 2,855,889
12/31/x1 300,000 342,707 42,707 2,898,596
12/31/x2 300,000 347,832 47,832 2,946,428
12/31/x3 300,000 353,572 53,572 3,000,000