Note Payable

Is supported by a formal promise to pay a certain sum of money at a specific future date usually in the
form of a promissory note.

A note can be a negotiable instrument that a maker signs in favor of a designated payee who may legally
transfer the note to others.

A note can be classified as either interest-bearing or noninterest-bearing

1) Interest bearing note have a stated interest rate.

-the fair value of note that bears interest rate is equal to the face amount or the purchase price.

;other terms for stated interest rate include nominal rate, coupon rate, and face rate.

2) Noninterest-bearing note do not have a stated interest rate because they include the interest
element as part of the face amount.

- the fair value of a note that bears no interest is equal to the cash price or when there is no cash price,
the present value of the future cash payment using imputed interest rate.

Initial measurement of note payable

:if not designated at fair value through profit or loss, is measured at Fair value minus transaction costs
that are directly attributable to the issue of the note payable.

: If irrevocably designated at fair value through profit or loss, transaction costs are expensed
immediately.

Subsequent measurement of note payable

PFRS 9, paragraph 5.3.1, provides that after initial recognition, a note payable shall be measured:

a) at amortized cost using the effective interest method.

b) at fair value through profit or loss if the note payable is designated irrevocably as measured at fair
value through profit or loss.

Amortized cost of note payable

-note payable initially measured at present value is subsequently measured at amortized cost

- amortized cost is the “amount at which the note payable is measured at initial recognition:
a) minus principal repayment

b) plus or minus the cumulative amortization using the effective interest method of any difference
between the initial amount and present value of the note payable.

Illustration 1: Note issued solely for cash

On October 1, 2022, an entity discounted its own note of P2,000,000 at 6% for one year.

Note payable 2,000,000

Less: Discount 120,000

Net proceeds 1,880,000

*discount (2,000,000 × 6%)

Entry to record the issuance of note payable

10/01/2022 Cash 1,880,000

Discount on Note payable 120,000

Note payable 2,000,000

12/31/2022; Amortization of discount on note payable

Interest expense 30,000

Discount on note payable 30,000

Q: Compute for the carrying amount of note payable as of December 31 2022

Note payable 2,000,000

Discount on Note payable (90,000)

Carrying amount 1,910,000

Illustration 2; Interest-bearing note issued for cash

On November 1, 2022, the Nag-Aginod Company obtains a loan of P1,000,000 from Matinabangon Bank
by signing a P1,000,000, 12%, 3 month note. The Nag-Aginod Company prepares its financial statements
on December 31, each year.

Required:

1. a journal entry required at the time of issuing the note on November 1, 2022.

Entry;

11/01/2022 CASH 1,000,000

NOTES PAYABLE 1,000,000

2. an annual adjusting entry required to accrue the interest on December 31, 2022.

12/31/2022 INTEREST EXPENSE 20,000

INTEREST PAYABLE 20,000

*1,000,000 × 12% × 2/12 = 20,000

3. a journal entry required at the time of repayment of principal as well as interest on February 1,
2022.

02/01/2023 NOTES PAYABLE 1,000,000

INTEREST PAYABLE 20,000

INTEREST EXPENSE 10,000

CASH 1,030,000

* Interest expense; 1,000,000 ×12% × 1/12= 10,000