Notes Payable

Lesson 8
Technical Knowledge
1. To define a promissory note
2. To know the initial measurement of note payable.
3. To understand the subsequent measurement of note payable at
amortized cost.
4. To understand the fair value option of measuring note payable.
5. To know the accounting for note payable issued solely for cash,
interest-bearing note payable and noninterest -bearing note payable
issued for property.
Definition
-a promissory note is a financial instrument, in which one party called the
maker or issuer promises in writing to pay the sum certain of money to the
other party called the payee either in demand of the latter or at a fixed or
determinable future time.
Measurement
INITIAL: fair value less transaction cost or FV only

SUBSEQUENT: amortized cost or FVPL

1.Short-term Interest-bearing (NR=ER)
Problem 8-1. Ontario Company, a natural energy supplier, borrowed P8M cash on
November 1, 2021 to fund a geological survey. The loan was granted by United Bank
under a short-term credit line. Ontario Company issued a 9-month, 12% promissory
note with interest payable at maturity. The fiscal period is the calendar year.
1.Short-term Interest-bearing (NR≠ER)
Problem 8-4. On November 1, 2021, supported by the credit line, Rose company issued
P20M of commercial paper on a nine-month note. Interest was discounted at issuance
at a 6% discount rate. Rose company paid the the commercial paper at maturity.
1. Short-term NonInterest-bearing (NR≠ER)
Problem 8-2. On October 1, 2021, Home Company issued to Security Bank a P6M,
8-month noninterest-bearing note. The note payable was discounted by the bank at
12%.
2.a Long-term Interest-bearing (NR=ER)
Problem 8-5. On January 1, 2021, West Company acquired a tract of land for P1M. The
entity paid P100,000 down and signed a two-year promissory note for the balance plus
10% interest compounded annually. The note matures on January 1, 2023.
2.b Long-term Interest-bearing (NR≠ER)
On January 1, 2028, Pepper Company issued a P3M, 12% promissory note for a
machinery purchased. The interest is payable every December 31 while the principal is
payable after 3 years. Market rate of interest is 10%. PV factor of 1 using 10% for 3
periods is 0.7513 while the PV factor of ordinary annuity of 1 using 10% for 3 periods id
2.4869
2.c.1 Long-term NonInterest-bearing (NR≠ER)
Problem 8-6. On January 1, 2021, North Company acquired a machinery with cash price
of P750,000 for P1,000,000. The entity paid of P200,000 and signed a noninterest
bearing promissory note for the balance which is payable in 4 equal installments every
December 31 of each year.
2.c.2 Long-term NonInterest-bearing (NR≠ER)
Problem 8-7. On January 1, 2021, South Company acquired a building for P5M. The
entity paid P500,000 down and signed a noninterest bearing note for the balance which
is payable in 3 equal annual installments every December 31 of each year. The
prevailing interest rate for a note of this type is 12%. The present value of an ordinary
annuity of 1 for three periods is 2.4018
Thank you!