Chapter 2 Notes Payable Related standard: PFRS 9 Financial Instruments —— ‘Learning Objectives oS 1. State the initial and subsequent measurements of notes 5 loans payable. 2. Apply present value factors and prepare amortization tabjg | 3._Account for origination fees. a | Notes payable Notes paystle are obligations supported by debtor promissan notes. The accounting for notes payable is similar to thy accounting for notes receivable (discus name Acs ot, Initial measurement Notes payable are initially recognized at fair vale mins transaction costs. > Fair value —is “the price that would be received to sell an asst or paid fo transfer a ibility in an orderly transaction between ‘market participants at the measurement date.” (PFRS13.Appé« 4) For measurement purposes, notes payable are clas into the following a. Short-term payable b. Long-term payable that bears a reasonable interest rate Long-term payable that bears no interest (noninterest bearins) 4. Long term payable that bears an unreasonable interest 1! (below-market interest rate) [A “short-term” payable is one that matures within 1 ye ‘A-“long-tern” payable is one that matures beyond 1 year. term payable short terme of a short-term payable may be equal to its face fait valu us fever, ifthe transaction contains a significant financing out, How te fair value of the short-term payable is equal to its present vale a term payables Longa value of a fle pyc tht bes « reasonable Jpnerest rate is equal 10 the face amount. An interest rate 1s srremed ‘reasonable’ if it approximates the market rate atthe transaction date 4b The fae value of long-term payable that Bears no interest (ong tenn noninterest bearing payable) is equal to the present value the fature cash flows onthe instrument discounted using an imputed interest rate. ‘The fair value of a long-term payable that bears an unreasonable interest rate is also equal to the present value of the future ‘ash flows on the instrument discounted using an imputed interest rate. Other terms for imputed rate of interest include effective interest rate, market rate and yield rate. Effective interest rate is the rate that exactly discounts the future cash payments of a financial liability equal to its carrying amount, Cash price equivalent The fait value of a payable may be measured in relation to the «ash price equivalent of the noncash asset (noncash consideration) received in exchange for the payable. Cash price equivalent is the amount that would have been paid if the transaction was settled outright on cas basis, as opposed to installment basis or other deferred settlement. Example 1 An entity purchases a TV set on a 6-month installment basis. The installnent price is P120,000. However, if the TV set is purchased ‘outright in cash, the cask price would have been P100,000. Scanned with CamScanner54 > The payable is initially recognized at P100,000, the cash equivalent of the TV set, Te £20,000 difference (ahr installment price les P100,000 cash price) is amortineg the credit term as interest expense using the effective ing method. Mery Example 2 ‘An entity purchases goods for P250,000 under a speciat period of 1 year. The seller normally sells the goods for mana teith a credit period of one month oF with a P5,000 discount yn cash basis (i.e, outright payment in cash), fe } The initial measurement of the payable is computed follows: * Normal purchase price with a credit period of one month 2200 Seal Picoaeght pment zm aa ratte te eos irked —S Both the purchase prices of P250,000 (special credit) and 220,000 (normal credit) constitute a financing transaction, ie, they include consideration for the credit period. To compute fr the cash price equivalent of the goods, the P5,000 discount fe outright payment is deducted from the normal selling price o 220,000. ‘Subsequent measurement Notes payable that are initially measured at face amounl subsequently measured at face amount or expected settle! amount. Notes payable that are initially ‘measured at amortized cost: measured at present rahe are subsequently > Amortized cost isthe “amount at which the finandil assel tion mi financial liability is measured at initial recogni’ ie principal repayments, plus or minus the Faceanouat [> Expected: sonable settlement interest rate amount Scanned with CamScanner~ titi 3 Longer [> Present value [> Amortized coo | noninterest: bearing 4 Long-term with [> Present value [> Amortlsed com unreasonable invorest ate FTC the cash price equivalent is determinable, the wate Ws gy measured at this amount. The subsequent measuremen ment 4 amortized cost A note payable may be issued for cash, purchase of for services, or other noncash consideration. Regardless of consideration received, the accounting depends on the classification for measurement purposes. notes Mustration 4: Short-term note On July 1, 20x1, ABC Co, borrowed P1,000,000 and issued a one ‘year, note payable. The lender “discounted the note at 12%", 9-The term “cane” as used In this context means the lender deduces the 1, lnterestin advance. ABC Ca’s proceeds rom the aoe are neo the sévaneed Case 1: Lump sum | The note is due in lump sum on June 30, 20x2. The effect of _discounting (ie. time value of money) Analysis: ‘The note is short-term and the effect of discounting is immatesal ‘Therefore, the note is initially meastired at face antonnt (net of te advanced interest) Jowrnel entries: Iulv. | Cash (nt 88% 880,000 77 J Discount on notes payable anata) | 120,000 Notes payable 100 Caleta Dec | Tnterest expense (IM x 12% x 6/12), 60,000, 22, |” Discount on notes payable soot _— 2 oo _ ie es ———— y m0 saa epanse N= RAY (é rr cont on noes payable co000 aie =P 1,000,000 wiv Soe Cash ih etme of le pb amounts of the note are determined as follows: Theory PBS july 1, 20x1- Dec. 31, 20x1 he 7,000,000 17,000,000 on st psble 20000) (0.000 oA outs $50,000. 940,000 curring ‘jgsuer” of the note, The lender is the “payee.” © "Discount on notes payable” is a contra-liability account (ie, a valuation account). It is deducted when determining. the ‘amount of the note, ‘© Theoretically, all liabilities should be measured at present value except when: a. the effect of discounting is deemed immaterial; ». discounting is prohibited by a Standard (eg, PAS 12 Zcome Taxes prohibits the discounting of tax liabilities); or {the transaction is made in the usual or customary terms TF the effect of discounting is not deemed immaterial, a short: ‘Rim note is nonetheless measured at present value. Judgment on materiality rests with the entity’s management, * The Giasdards do not require short-term notes to be measured "se amount nor prohibit their discounting, Scanned with CamScanner58 [Case 2: Installment | The note is due in equal quarterly installments start | i ating So | 30, 20.1. The effect of discounting is immaterial _ Prem, Analysis: ‘The note is also measured at face amount. However, because rote te due in installments, the P120,000 advanced inter ® allocated over the installment periods based on, for example, al Outstanding principal balance ofthe note oF some other abijay apportionment. Journal entries: Taly 1, | Cash (66%) "880,000 20:1 | Discount on notes payable Mx 12%) | 120,000 Notes payable ‘Sept._| Notes payable 250,000 59 tes yee sme enerying amounts of the note are determined as solows Tat Hist Soph 3 ed Des 3H 201 paca om ——~500000 on 464,000. Ds $80,000 678,000 rein a —sn000 73 Long-term note with reasonable interest ~ re interest reper 1, 2081, ABC Co. issued a two-year, 12% 11,000,000 once gee el i eo note or 203 ou inert due arma. os ¥ Type of payal pominal rate fecogrition Because NO a ile: Long-term with reasonable interest rate ~ the 12% is assumed to be equal to the current rate on initial \dditional information is given. 30, | Interest “ x ay | ers ces 45000 vam} |¢ {pital measurement: Face anzount vient measurement: Face amount or expected settlement! Discount on notes payable ™ ram face pected setlement Dee._| Notes payable 250,000 mee , i y ‘Type of interest: Simple interest ~ interest is computed only on 31, | Interest expense ™ 36,000, 2 the outstanding principal balance aot | Cash eon i princi Discount on notes payable ® 36] pura entris: Tie eniosin 2082 follow the same pater. Ot | Land TooaoooTl aod | oN b _ tes payal Outstanding balance ; ee cao Date ofnote Atioction Interest eqs} | DEBT Tintrst expense 12537) sonar 3.30.1 7,000,000 120K x 1/25 48,000 " Interest payable 30,000 123131 120K x 7525 36,000 fond te aera ist " 33142 120K x 5/25 24,000 G24 Tntorest expense (1M x12%x 912) "90,000 63032 120K x 25725 12,000_| Interest payable 130,000 2,500,000 120,000. — 120,000 2 rede parent of crc nest Bem "| Tnierest expense (IM x 12%x ‘The fractions used in the allocation are derived from te) | mee eae 12x32) 30,000 somo forecod te ecrieteet " outstanding balances of the note. Scanned with CamScannerao ‘Oct. | Interest expense (IM x12%*972) 2053 | interest payable Cash record He pagent fect str Notes payable Cash On: 2013 ered eset of ete pie Ilustration 3: Long-term note with reasonable interes, ‘Compounded interest . note payable in exchange for a piece of land. Principat gu interest are due on December 31, 203. “Analysis Pe type of payable nd Measurement -sanie a Hlistration 2 apne % Type of interest Compounded interest ~ interest is computed gy both the outstanding balances of principal and accrued interes, Journgl entries: nt. | Land 7,000,000 201 | Notes payable 1000 tnvco eotpil ‘Dee. | Interest expense (IM x 12%) 120,000 a Interest payable 120) son | Nand ns ms Bie] Tne expense [0M +120) 12% 134400 Interest payable 1344 pe | Oe it Des. | Interest expense [(iM+ 120K e134aK)x 12%] | 150,528 £2, | terest payable 20020 +1360) 254,400 Cash 04g tomo he poyment of cred intrest ‘Dez | Notes payable 7,000,000 2, cash som tard th stonent of rte pyle a lon tel, ABC Co. acquired a piece of equipment in Y 0" p100,000 cash and a noninterest-bearing. note of "ae on Jnuary J, 20d. The prevailing rate of interest Pepto ot thi analysis :-term noninterest-bearing (Lump sum) ci psyale: tog (lamps Type Tureen Ps ee (sing PVP) 7 Mibsoquent messurement: Arvoticel cst “bt ensure Fature cashflow (face amount) ono 0 fa PV PL 012% 03 __ a a of ote payable Jan 120 71,750 ‘Je | Equipment (100K + 711,780) am Tr Pench onnots poable rnin | 28220 Cash soon Notes payable mae + Nes = The difference between the present value and the face amount represents the discount on note payable. The unamortized balance of the discount is deducted from the face amount when determining the carrying amount of the note. The ‘discount on note payable’ on initial recognition of a noninterest-bearing note represents the total interest expense lobe recognized over the term of the note. The equipment is measured at the amount of cash paid plus present value of the note issued. Scanned with CamScanner2 ee 8 sential mensuernents ows, al rstallnents TIM 4) 250,000 Fate a DY of nt ordinary asnnity of PL @12%, wt 3.037349 ec ee. ST TT fquipment (100K + 759.337) 859337 —— - Tet | Bipcount on notes payable aM=759297) | 240,663 “The ol ltt expense © dacnnto Cash 100,000 note pagal inital reegsion Notes payable 1,000,000 Other pertinent entries: ‘bsabsequt menurement: Amortization table stallnen ‘Dec.3%, | Interest expense 85414 | Interest | Present ze Discount on notes payable 85a | _ ate [Payments | expense | Amortization __enlne _| Dre 3t, | Tnterest expense 95663) SY fn 2 aa “| 739,337 _| eae Discount on notes payable $e 04s? | ‘Dest [Interest expense Fay “272512 _| el Discount on notes payable ora Tanct, | Notes payable 1,000,000 2m Cash 1.00000 Other pertinent entries: ees sei ation Determine the coving amount f the ae on Deeb se me re ® Dele] ac | Notes payable 250,000 peepee 711780, the PY of pote on Jon 1, 20x Multiply the amount by 1.1214 Interest expense 91,120 12h You shall get 79719, the careying amount on De. 31 20 Cash earn + Mutilyapain by 122. You should get 892887, the cory amount on De. Discount on notes payable 91,120 [© 20.2.smemmssveomnivio) DEST Notes payable at Itustration 5: Noninterest-bearing note - Installment eae aed 72055 (On January 1, 20x1, ABC Co. acquired a piece of equipment Discount on notes payable ees exchange for 100,000 cash and a P!,000,000 roninterestbeatt] | 97" | Notes payable ae note that is due in 4 equal annual installments starting ¢ 79 | Interest expense 50,701 December 31, 20x1. The prevailing interest rate is 12%. Cash ” 250,000 : Discount on notes payable “Analysis: Sau | Notes payable 350,000 a Type of payable: Long-term noninterest-benring (nstlinent) Interest expense ea Initial measurement: Present onlue (using PV of ordinary annityef?) Cash, eae Discount on notes payable 26,787 Subsequent measurement: Amortized cost Scanned with CamScanner$e Current and noncurrent portions of a note payable When the principal amount is due in installments, the carry, amount of the note includes both current and noncurrent por These portions are presented separately in the finan, statements, To determine te current and noncurrent Portions, yx simply refer to the amortization table. The etrrent portion is yy amortization in the immediately following year. This is yy portion ofthe next year’s payment applicable to the principal, 7p. noncurrent portion is the present value in the immediate, following year. For example, the carrying amount of the note oq December 31, 20x1 is 600.457. The current and noncursent ortions of this amount are determined as follows: Tinterest Date _|Paynents | Te | Curent portion of the note [Noncurent portion ofthe nets psf : Noninterest-bearing note — Installment in aan oy 4, 20x1, an entity acquired a piece of equipment in Or Jar #300000 cash and nonintresbearing note of ext tat de 4 eal ana slic The fot fu ent 4s ave om January 1, 2x1, while the suecreting install aiue every December 31. The elfective interest rate is gales 10% oo sage Toy payle: tone te snr ene in vee! ee ee 4 i men: Anarade 4 Initial measurement Future cash flows, annual installments (P1M +4) Muliply by: PY of an annuity due of PI @12%, n=t Present value of note payable - Jan. 1, 20x1 250,000 3.40183) 850458 ‘Theentries on January 1, 20x1 are as follows: payableon Dec 31,2081 payableon Dee, 31,201 inet] Equipment od 830,55) royed %1 | Discount on notes payable (iM 5045s) | 149,542 When disclosing in the financial statements, the discount on Cash 100,000 notes payable is allocated to both the current and noncurtent Notes payable 1,000,000, portions of the note by deducting the present value of the portion | [= 7. | Notes payable 750000 from the related future cash payment. ma | “cash 250,000 Current portion: Lorre fst inline! pape Notes payable (20000 due in 202) 250000 Discount on notes payable Qs0k 177845 caret prion) 72053)|| -& Subsequent mensurement: Amortization table (hstaliment) | Notes payable, net (preset in curt iis) 17,35) ‘Noncurrent portion: Notes payable 250.00 duein 20x3 + 250000 due in 20) 500,002 Discount on notes payable (00K ~42.512noncurrent portion) _ (77488, Notes payable - net (preset in novicurrent habtties) 425i Total notes payable, net - Dec. 31, 20x1 P 600A | Interest T Payments expense _| Amortization | Present value Scanned with CamScanner66 a co No interest is recognized on the first installment beau interests incured only ater a passage of tne ‘The entry on December 31, 20x1 is as follows: Dee 31, Notes payable 750,000 2087 | Interest expense 72,058 Cash 2 Discount on notes payable aa 4 Query: What i te balance of the ‘Discount on notes payabjy ‘on December 31, 20*1? Answer: Outstanding face amount (1 es payments of 250K 250K) sono Present value on Dec. 31, 20x1 29 Discount on notes payable - Dec. 31, 20:1 Tae i. / tustration 6.1 ~ Installments due at the start of each year / Use the same information in ‘Mlustration 6” but assume that te succeeding instalment payments are due every January 1. Requirement: Compute for the carrying amount of the note on December 31, 20x1 Solution: | Interest Amortization | Present valut | an. 1, 2032 | Jan. 12033 Jan 1, 2034 The amortzation table above shows the carrying amout ‘on January 1 of each of the subsequent years. The carrying amu 67 eel tele emeae a ecember 31 is computed simply by adding back the Jan. 1 on et pry e carrying amount of the note on December 31, 20x1 is computed 25 Flows jng amount of rote payable on Jan. 1, 0x2 42513 in ment Ja 3,282 eas ei mt ofete pyar ee 2ed 8. Noninterest-bearing note - Semiannual inustration 7° me " Hine xt, ABC Co sucd « 330m, 120000 Crrinterestbearing, note payable due in equal seniamual payments starting on July 1, 20x, The prevailing interest rte is 10%. Discomting semiannual cash flows When discounting cash flows that are due in semiannual installments, the “nt” (period) used in the present value factor is multiplied by 2 because there are two semiannual installments per year. Furthermore, the effective interest rate is divided by 2 because interest rates are normally expressed on a per annum bass. 4 The 'n” to be used inthe illustration above is 6 yersx2) and the discount rate is 5% (10% +2), Initial measurement Future cash flows: semiannual installments (12M +6) Muiply by: PY of an ordinary annuity of PE @5%, n=-6 Present value of note payable 200,000 (692 1,015,138 S_ Subsequent measurement: Amortization table (Eustallmert) | | Interest | | Present Date _ Payments |_ expense Amortization | value Jim t200 | [015.138 _] — 200,000 | 50.757 | 149,243 | 865,895_ Scanned with CamScanner|_Dec. 33, 20x17 | 200,000 | Juty 1, 20x2 | 200,000} “Dre 32027 | 201 Jnly3.2013 | 200000 Dec, 31, 20x3_|_200,000_} ‘The interest expense in 20x] is P94,052 60757 + 13299) Illustration 8: Noninterest-bearing note — Non-unitor, installments On January 1, 2 oxi, ABC Co. issued a 3-year, Plano noninterest-bearing note payable d jue as follows: 8 He rent measurement: Amortization tle installment) 7 Tterest ments | _expense_| Amortization | Present value .n; First installment payment due in advance mation in Illustration 8 except that the payments variatio Use the same infor are due as follows: Date Amount of installment ‘Amouat of instal men Ds ea 1, 201 600,000 january 1 u emer ane sooo Janay 1202 ‘ew an ac ae oe ‘ ernber Sh Pern Total 200,000 Totat 200,009 i ‘ etn eee ane EE ee ‘The prevailing interest rates 10% Date Payments PV of PI © 10%, n=O to Present value fl i fo Tent 2007 600,000 1 600,000 Discounting nonsniorm Ganeaua cashflows ee ee a sono ‘Annuity factors are applicable only when the series of cash fins] [3 Snag =m ses are uniform ot equtl. When the cash flows vary, the PV of] —"Totais —i,300,000 ee Should be used. A cash flow that is due one period from inl] “F575, cot-acg ym ooouw wel CODON recognition is discounted using an ‘n’ of 1. A cash flow thet isd ; two periods from ntl recognition i discounted using an'*e] ustraion 8: Noninterestbesring note — Cash price 2, and so on, ++ Initial measurement: sb Initial measurements Date Cash flows PV of P1@ 10%, n= 1 40.3" Present 545454 Dec 31,207 660,000 0.90909 4 De.31.20%2 400,000 0.82645 ae Dec 34,2033 200,000 ozsi31_ SDE) 1,026,286 is 1,200,000 Tis 090909; 2 is ORD6H5; and w=3 9 075131 equivalent (On January 1, 20x1, ABC Co. purchased an inventory with a list brice of P1,100,000 and a cash price of P1,000,000 in exchange for a 1,295,029 noninterest-bearing note due on December 31, 203 Analysis Initial meas fhe messurement Te fir value ofthe note on initial recognition is 2 Suactsh price equivalent of th inventory purchased. lubsequent measurement: Amortized cost Scanned with CamScanner70. The note payable is i initially recognized as follows: Tet HTeventory 1 0a Discount on notes payable 1.29592°-1™9 Notes payable 000,000 295,028 The list pris difference between the face amount equivalent repre amortized as interest expense u ‘The application use of an cffectie inte discounts future cash flows to the can instrument. In the problem al that would discount the 1,000,000 cash price equi the trial ane error approach. rest rate, which is the Trial and error approach First trial: (using a random rate of 10%) > Future cash flows x 1,295,029 x PV of PI @ 10%, n=3= 1 (0,295,029 x 0.7513148) = 972,974 is not We need a higher amount of present v decrease the interest rate (Notice the inverse 000,000 > effect Second tril: (at 9%) > Future cash flow 1,295,029 x PV factor at 9%, n=3 =1,000,000 4 The effective interest rate for the note is 9% table is prepared as follows (4,295,029 x 0.7721835) = 1,000,000 is equal fo 1,000 ce is ignored becouse it 8 iteley iemsant ofthe note and the eagh nether ot nots payne which wy sing the eftie ieres meng, ane efetce interest nellod reqiney Pri. ‘lly rate that exagn ying amount of a fining ov, te effective interest rats the 295009 face aout egual tee valent, We will compute £0 this un PV factor at x%% = PV of note ‘equal to 1,000,000 alue. Therefore, we need relationship between te ve infrest ate and the present value) Let's try 9%. os x PV factor at x% = PV of note 000 The amortizat 123504 a “expense | Disconnt on NIP | Present ale 395029 | 1,000,000 _ 9 | ____1,090,000 scosed exhaustively 0 Chapter 5 of Inte term note issued solely for cash "ABC Co. issued a 3-year, 1,000,000 ayable to XYZ, Inc, a related party, in ailing interest rate is 12% 10: Long: 20x1, ing note Pi ial to present value of note .ds of P711,780 on the note. _ cote is long-term and noninterest-benring. Therefore, itis 3 = F711,780). wed at present value (IM x PV of PI 612% r= > Then meas ‘Theentry to record the note is as follows: ct [Cash 71,780 Zikt | piscount on note payable (M~711.760) | 286,220 Note payable 1,000,000, — Te voceeds equal to face amount of note Case 2: ed proceeds of PI,000,000 on the note > The note is also measured at the present value of P711,780. However, because the proceeds are equal to the face amount (hich is usualy the case in realife transactions) a “Day1 difference” arises. The entry is as follows: = [ch 7,000,000 hy | Discount on note payable aM -71,78) | 288,220 Note payable 1,000,000 Unrealized gain “Day 1 i 236,220 | Scanned with CamScanner| ze Shope Bo Rha The “Day diference” is recognized immediately in pg, oF loss on initial recognition. The “Discount on note payabjr amortized using the effective interest method. Illustration 11: Note with ‘below-market’ rate of interest On January 1, 20x1, ABC Co. issued a 3-year, P1,000,000, 3% nop, payable in exchange for a machine, Principal is due on January 20x but interest is due annually every January 1. The prevaing interest rate for this type of note is 12%. Gage ep ng rp trie. | re chow te caret of al messureent Prete | oon rvtue factors: “PV of PI forthe principal becauseitis | due in lump sum at maturity date. “PV of ordinary anmuity of ae are crate de poi Sree nceuement Ani st sateen Initial measurement: Future cash flows Principal Interest (M38) Total PV factors, 7,000,000 (PV of @12%. 0-3) 30,000 (PV of ord. ann. of 1 612%. n=) Present value 7,780 72085 4b Subsequent measurement: 7 Payments for interests Interest expense on. 12097 fn 1.2022 30,000 on. 1,20x3_» 30,000 | 101,747 30000 | 110.358 Jo. 1, 2008 os reel util tits was pnt on note payable pies Note payable, nono anes = i interest payable (IMx 3%) 30,000 Le epee mon ea cash sot Interest payable (IMx3%) ean gas a i Nat payables computed by multiplying the nominal rate Fee jace amount. Intest expense is computed by * atipying the eftive interest rate othe present vue, The discount amortization increases the interest_ expense recognized each period. Total interest expense over the life of the note is greater than the actual payments for interest. “+ The total inlerest expense recognized over the life of a note ‘with unreasonable interest rate is equal to the sum of the discount on note payable on initial recognition and the subsequent payments for interest. (216.165 dicount omni reston 1 0K a pyre for interes = 30 15 ttl ies expos, (94050 + 101,77 = 110358306165 ol nee expose nl). The following other present value scenarios are discussed in Chapter § of Intermediate Accounting Part LA: Note with below-market interest (simple interest) - Principal due st maturity, interests due fn semi-anpual installments Note with below market interest (simple interest) - Principal and interests due in installments ote with ‘below market interest (compounded interest) - Vincbal and interests due at maturity Nor-interest bearing note with deferred payments Scanned with CamScanner74 a. Loans payable Loan payable is similar to note payable, ie, itis also suppo formal promise to pay a certain sum of money at specig OY, date(s). However, the tert “loans payable" can be used to «." bank loans and similar types of financing. ‘ Loans payable are accounted for similar to notes pa, However, loan transactions normally involve transaction co" Recall that financial liabilities are initially recognized at fay ity Onnge tnins transaction costs > Transaction costs are “incremental c0sts that are di attributable to the acquisition, issue or disposal ofa finan asset of financial liability. An incremental cost is one gs St a efecto jeoued or disposed ofthe financial instrument.” 8 +aypuq Transaction costs include fees and comassions pai y agents, advisers, brokers and dealers; levies by reguay sagences and securities exchanges; and transfer exes ant dn Transaction costs do not include debt premiums discounts, financing costs or internal administrative holding costs Origination fees Origination foe is an upfront fee charged by a lender to cover te costs of processing the loan (eg, evaluating the borrower financial condition, evaluating and recording _guarantss collateral and other security arrangements, negotiating the tere fof the instrument, preparing and processing documents ari closing the transaction). Origination fees normally come in te form of a “service fee” which is a percentage of the prindpl amount and is directly deducted from the loan proceeds reless to borrower. Origination fees are deducted when measuring © carrying amount of a loan payable. Origination fees * subsequently amortized using the effective interest method: ) ———eeEE wes Patt _—_———— increases both the interest expense and ent amortization subsequi g amount of the loan. et ate, meaning on transaction date, the origination etetive gd as an adjustment to the effective interest rate. fees ae 700 jon 1 Origination fees On am ge 93% loan origination fee. The principal s due i sy 1, 2Oxd but 10% interest is due annually starting on ap yanary sanuary 2, 20%2- ial measurement * pincipal amount 1,000,000 Origination fee (Mx3%) __ 660,000) 1,201 970,000, Carrying amount of oar on Jan. cs ee «SY HOT ax! | Discount on loan payable 30,000 oP Caan pavable 110900 4& Subsequent measurements The effective interest rate on the loan is not equal to the 10% slated rate because of the origination fee. We will compute for the imputed interest rate using the “trial and error” approach. To limit the number of “tries,” we need to observe the following concepts: © Ifa financial instrument's carrying amount is Tess than its face amount, the difference is a discount. | * Ifa financial instrument's carrying amount is greater than its {ice amount, the difference isa premium [ Bicout Carrying amount is less than Face amount Premium — | Carrying amount is greater than Face amount Scanned with CamScanner76 Pe ‘= When there is discount, the effective interest rate ig 4, than the nominal rate (stated rate or coupon rate), hy 2 When there is premium, the effective imterest rate is Jeg,» the nominal rate. ‘ Ferest rate is higher than Nomingy alr Effecti rates less than Nominal Discount. Effective interest Premium ‘There is no discount ot premium if the carrying am, equal to the face amount Consequently, the effective interes is also equal to the nominal rate, wy ‘Continuing the illustration, we know that the Ig, jequed at a discount because the initial carrying amon ¥5yo.00 is Fess thar the face amount of P1000,000. Thereor, m1 effective interest rate must be higher than the nominal rate o¢ “ ‘Trial and error approach with Interpolation Future cash flows x PV factorat% = Present value First trial (using 11%): >” erincipal of 1,000,000 x PV of 1 @11%, n°3) + (Interest of oy xPV of ordinary annuity €11%, n=3) = 970,000 > (1,000,000 x 0.731191381) + (100,000 x 2443714716) = 970.00 } (BLI91 + 244,371) = 975,562 is not equal to 970,000 We need a lower amount; therefore, we need to incre the rate. ‘Second trial (using 12%) . > (1,000,000 x PV of 1 @12%, n=3) + (100,000 x PV of ori) annuity @12%, n=3)=970,000 > (1,000,000 x 0.711780248) + (100,000 x 2.401831268) = 970.000 (711,780 + 240,183) = 951,963 is not equal to 970,000 7 here, we need to perform interpolation. We can infer ‘es derived above that the effective interest rate is tue valu rom 1 vd 12% (ues higher than 10% but lower than 11%). free 112640 orm the interpolation, we will use te following formula xh = 11% 12% - 11% focve interest ate. oper tert gst “The formula is derived based on our supposition that the apecive interest rate is higher than 11% but lower than 12%, efeie tat the Jower rate appears in both the numerator and Netemiraor ofthe formula while x% appears inthe numerator, et us substitute on the formula the present values that we have computed earlier: 970,000__- 951,963 - 973,562 975,562, (8562) _ (23509). 02382 ‘The computed value is added to the lower rate to derive the effective interest rate. The effective interest rate is 11.2357% (1% +.2357%). The amortization table is prepared as follows: Interest expense | Interest | | Date. payments 0M 288982 = 1,018; (100K + 1,018 ~ 111,018) emirate the Mol erence duct oundingof I» ependsheet application i 8, Microsoft. Excel act effective int sree 19, the exact effective interest rate is Scanned with CamScannercn 79 MB ite Ilustration 2: Amount of loan amortization ha cash price of P2,000,000 thr. You want to acquire a car wit we pmonth auto Toan that requires equal month-end paygyy ‘The effective interest rate is 12%. Requirements: Compute for the following: a. Amount of monthly payment bb. Total interest expense on the loan Solutions of monthly payment Requirement (a): Amount Future cash flows x PV factor = Present value ature cashflow: This represents the monthly payment on ty ‘This i what we are computing. ‘due on a monthly basis. According, ‘and a discount rate of 1% 255, Joan. + Pl factor: The payments are wwe will use an “n” (period) of 22 amram ont) rede ee: The present value is 2,000,000, fc, cash price, 4 uate cash lows (PV of nary anny 1 1% a2) = 2,008 > Future cash flows x 11.2550775 = 2,000,000 “° > Future cash flows =: 2,000,000 + 11.2550775 7 Future cas flows (nonthiy payment) 217769758 Requirement (6): Total interest expense over the term of the loan Monthly payment wens Multiply by: No. of payments on the oan Total eash payments aaa Present value of loan on initial recognition anno Total interest expense 7323708, Present (aaa | “83.027 I | aao0.0 “| | agaaa.on | "15927456 | [tessn 28 | r6086730 |-asaaio1_| 16247597 [713,596.85 | 3 ipsse4_| 16 nse. | 167316 | siea96 756 | 82443 | 169073.15_ | ess30981 rigrae | $903.70 | 707e388 | 522460595 —~yp7799758 | 5.22606 | 17247152. | 35019441 saat | —iprae | aio | wanseas | s38 use comers | 179d | ssaki2 i 0.00 ah — gare 2.37095 2.001000 ‘cost of bank loan revtost of bank Ioan may be cetermined in several ways. rp interest ate fora Tear foan= Interest + Borrowed amount « Diecnnitd interest rate fora T-yenr loan = Net interest expense ~ Net loan proceeds « Adi-on installment interest rate for a T-year Toan = Interest = “Average borrowed amount Illustration: Cost of bank loan On January 1, 20x1, ABC Co. obtained a P1,000,000, 180-day bank loan at an annual rate of 10%. The loan agreement requires ABC to maintain a P100,000 compensating balance in its bank account at the lending bank, ABC would otherwise maintain a balance of only 50,000 in this account. The bank account earns interest at an. annual rate of 2%. Requirement: Based on a 360-day yeat, compute for the effective tate on the borrowing. Satin: Scanned with CamScanner= Vv a 81 SR Discovrted interest rate for @T-ycor loan = Net interest o loan proceeds *Pense +4, (IM 10% x 180/360) ~ (60,000 x 2% x 180/360)] + [1M ~ 59,999 = 493500 = 950,000 1 5.21% (effective rate for 180 days) 219% x2- 10.42% (effective rate for 360 days) Secured loans ‘A secured loan is one that has a collateral security which ender can take if the borrower defaults. Examples: & a. Mortgage loan ~ loan secured by @ real property (eg, jy pulling), The borrower signs a mortgage note evidencing Joan and the encumbrance over the property te 'b.. Chattel mortgage ~loan secured by movable personal pro (eg. car, equipment, jewelry, oF livestock) ‘Assets such a5 inventories, cash surrender, receivables, cash in bank (e.g, compensating, balance), in investments in securities can also be used as collateral secu Pery for loans Fixed and Variable interest loans [A fized interest loa is one where the interest charges are based on fixed rate. A variable interest loan is one where the interest chars vary as market interest rates change. The loans (notes) in ty previous illustrations are examples of fixed interest loans Va Tate loans are discussed in Adonnced Accounting 2. Credit ines Some loans are obtained through pre-arranged credit lines. 4 credit Tine (line of credit) is an arrangement between 2 finan iratitution (eg. a bank) and a borrower that establishes maximum amount of loan (credit limit) that the borrower Sbtain, A credit line assures the borrower of an immediate of financing when the need for cash arises, but subject fo the cel limit. This provides convenience and saves the borrower, costa vidual loans. Further time in processing numerous indi ewe _ _ sors ape 1 accrues only on amounts actually borrowed: thus, gry interest expenses can be avoided ‘you expect to need approximately P100,000 However, incr er exarpl seat fea months to finance = business oo oye P2000. You dot want to borrow the cue orgpad0 row Desese you dont want to ine wie of Piers expense on the excess cash, Alo, you don't nec emaive investment opportunities forthe excess cash pave 20Y erand, you want f9 have an immediate source of On ot ed forthe aitonal P6000 arises: You an fa jena by bling » 10000 credit fiw and cet 20 ns. Interest sa fo atr but only on the sor Gerowed. When further nansng i needed, you can ithe unused credit ine of PBO.000. Nojoumal entry is made when a credit line is obtained cay the actual amount borrowed is recognized. The unused tradi ine is only disclosed in the notes and is not treated as cash or obligation. Credit card ~ a credit card uses a line of credit granted to the cardholder by a bank or a credit card company. The cardholder ‘an use the credit card to borrow cash or make credit purchases, When the credit card is used, the cardholder becomes a debtor to the card provider. When the credit limit is reached, the card can no longer be used until the obligation is settled. ‘A credit card is different from a debit.card. A debit card is linked to the cardholder's bank account. Therefore, the funds used for purchases are automatically withdrawn (debited) from the cardholder's bank account. When the funds linked to the debit card are consumed, the card can no longer be used until Additional funds are deposited to the account. A debit card is not 2 rit line because the cardholder actually owns the eash being ee words, «eet card allows the cardholder to wee Is of another entity (the card provider) subject Scanned with CamScannerBR ay putin a cashless ard conv cardholder to use his own funds way, electronically. Revotoing credit agreenent commited Tine of ere) impy Tegel obligation onthe bank but he Borrow PODS 9 comming a fee: A credit line which imposes 7° legal obligation on the bang” called non-conmitted line of er * Paper ais of short-term (usually 270 days oF, issued to investors by big compari. mmercial papers are traded in mone ‘They are usually issued 3.) f financing compared to ban, ‘Commerci Commercial paper €0 unsecured, notes payable with high credit rating. Co vrarkets and thus highly liquid discount and are a cheaper Source O loans. a Ey 2. summa ee a mg ae rely vgn tf aig mts ] . (s. The fair value may ‘be measured as follows: st ransactio c08 ‘a sues face ansount or present value; (oa ete resent ale wl Mragerninable, the cash price eqnivalent of the rnoncash, ‘consideration received: vat nate (nominal rae, coupon rate, oF face rate) is the stated inter ‘ appearing onthe face ofan interest-bearing noe, te tet rate impute te fers euro ‘market rate eit at) isthe rte used in present value computations vet aterest bearing rote has an wnspeced principal and an varied interest, These elements are separated through present value computations Piture cash flows x PV factor at x%= Present value «pv ofrisused when the fare cash flow is ue in lp sum orwhen the series of cash flows are non-uniform. PV of at ondinary annuity of PL is used when the future cash flows are due in installments and the frst installment does mot begin immediately: PV of an annuity due of PL is used it the first installment begins immediately. «Total interest expense recognized over the life of a tearing note is equal to the discount ov note payable on initial roninterest- recognition. 4 Interest payable = Face amount x Nominal rate + Interest expense = Present value x Effective intrest rate + Origination fees are deducted from the carrying amount of the loan are and subsequently amortized using the effective interest method. Scanned with CamScannerPROBLEMS bess 1: TRUE OR FALSE |. Interest payable is computed by multiplying the amount Cfo mote with the effective interest rate, Dy 2. OnJan.1 20n1, Crybaby Co. issued a noninterest beg ean ONL CT paM and appropriately recopnings tt 1,241,843. The note matures in lump sum on Dew ey ity ‘The effective interest is 10%. The unamortized disc a Dec. 31, 20x2 is P497,370. unt 3. Raining Co, issues a S:year, noninterest bearing py 171,000,000. Raining Co- determines that the effective iny. rate on the transaction is 10% The initial carrying amon the note payable is computed as: 11,000,000 x PV of 1 Cee « Wet Co, issues a noninterest-bearing note of 3,000.00" site is payable in three equal annual instalinens 1,000,000, due at the end of each year. Wel Co. detemg thar the effective interest rate on the transaction is 10%, he sal carrying amount of the note payable is comput: 1,000,000 x PV of 1 @10%, n-3. 7 5. Fold Co, issues a 2-year, noninterest-besring no's of PL 2 Fotschange for the purchase of a commodity. I Fld Coy ae gutright in cash, the purchase price would have fe Pso0.000. At inital recognition, Fold Co, records disso rote payable of P 400,000. 2-year, noninterest-bearing note of Pit 6. Bind Co. issues a for the purchase of equipment with a cash Pritt of Pout ‘The note requires ump sum payment at maluly date. i Co. determines that the effective interest rate on © section is 10%. The intrest expense in Year 1s 5c ring not tran: 7 Gat Co. issues @ long-term, noninterest bea x P100,000, The note requires a Jump sum payment at te ve interest rate oP date. Cut Co. determines that the effectiv transaction is 10% and the 0,90. The interest expense in appropriate present vali® fact Year 1 is P9,000. ae 85 yt ., Cut Co. con in the preceding probiem ise in Year 2 is P9,900. eres 2 PLO, rire * tnents On initial recognition, * 7900.00. 16 the amotia ang te period i 5000 he can amount of the te en oft pid mus 50.0 apps 2M 20000, aint ening 9 that is © Hanes, On initial recognition, the carrying syable in ins fhe note was 900,000. At the end of Year 1, the so the note was 600,000. The amortization of 1 must be P100,000 wo the informati saterest EXPEM bearing note that is whe carrying tion of the 0. amount of t enrrying amount thenote in Year JM 2: MULTIPLE CHOICE - THEORY lowing statements is incorrect? ily recognized at fair value minus PROBLE! 1. Which of the fo Notes payable are initia transaction costs. b. Discount on notes payal account rather than an asset account. ‘A short-term, non-trade note payable may nevertheless be Giscounted if t clearly contains a financing component. 4,_All interest-bearing notes need not be discounted. ble is treated as a contra-tiability © 2, ‘The concept that best supports the discounting of notes to their present value is a._ time value of money. c.accrual basis. b, matching. d. legal form over substance 3. Whid Which of the following rates is used to compute for the interest expense on a note mn a note payable? a. stated rat ted rate .effective interest rate b. nominal rate d. coupon rate Railing Co. i Rating Cased ens P08 riers bearing note quires payment in lump sum at-maturity date-Railing Scanned with CamScannerdetermined that the effective interest rate on the roy Which of the following statements is correct? a. Railing Co. will most likely measure the note g, , recognition by multiplying te fee amount of he, Sy PV of 1 @12%, n=. e b. Railing Co. will mos recognition by multip Pvot rainy annuity of 1 @12%, n= c Railing Co. will most likely measure the note gp i, recognition by multiplying the face amount ofthe yg PV of an annuity due of 1 @12% n- hy ._ Any of these asan accounting policy choice is, likely measure the note gy the face amount of the il lying, OF the niet (On Ottober 1 of this year, a company issued a one-year, payable that bears a market rate of interest. The face mye Of the note and the entire amount of the interest are dys September 30 of next yet. At December 31 of this year, «| entity should report on its statement of financial position a. interest expense for the interest accruing this year, b. interest payable equal to one-year's interest on the note no interest payable. d._ interest payable for the interest accruing this year. Drops Co. issues a 3-year, P600,000, noninterest bearing nce that requites three equal annual payments at the end of ex year. The effective interest rate on the note is 14%. Hos should Drops Co. measure the note on initial recognition? 2. P600,000 x PV of ordinary annuity of 1 14%, n=3 b. P60H,000 x PV of 1 @14%, £200,000 x PV of ordinary annuity of 1 14%, n=3 4. P200,000 x PV of an annuity due of 1 @14%, n=3 An entity issues a three-year, PIM noninterest-bearing ™*) that matures in lump sum payment. The effective interes ™ is 12%, Which of the following is correct? —— 7 surement of the note on initial recognition iS he meast ; Tented as PIM x PV of an ordinary annuity of 1 @12%, computed ned. ore No interest expense shall be recognized on the nol Ne se itis noninteret-bearing beer ortiz cost ofthe note increases each year & The amortized cost ofthe note decreases each yea. “enny soe #tre-yenr, PIM nonitrest bearing nat 8 Ae a mre on anal payments de atthe end of in iyear. The effective interest zate is 12% Which of the following is correct? espe measurement of the note on initial recognition is computed as PIM x PV of an ordinary annuity of 1 12%, net bp. No interest expense shall be recognized on the note because itis noninterest-bearing, ‘The amortized cost ofthe note increases each year The amortized cost of the note decreases each year. 4 A company issued two one-year notes in exchange for merchandise. One note has a face amount of P6,000 and was interest-bearing at an annial rate of 18%. The other note has a face amount of P7,080 and was non-interest-bearing (its implied interest rate was 18%) a. The tolal amount of cash ultimately to be paid will be more for the interest-bearing note. b. Both notes will cause the same total interest to be recognized, © The amount of interest expense that should be recognized is higher for the interest-bearing note. 4. The amount that should be debited to the inventory account is higher for the nonint ring not ray *0C0URES higher fort terest-bearing note Scanned with CamScannerCT 10. On March 1, 20x1, Nickelodeon Co. issued P6,000, 14, dated January 1, 20x1 in exchange for an outstanding aceuttt payable of P6,000. The principal and the &-month inter! the note are due on July 1, 0x1. On initial recognition, 9% 2 hi Of the following accounts increased iy 2. Prepaid interest ¢. Discount on note payable bb. Interest payable terest expense tis Reese engender AMBITION gy PROBLEM 3: EXERCISES ark, Inc. issues a noninterest-be, 1. On January 1, 201, BE 5 7 rote of 2,000,000 jn exchange for equipment. The notes? an December 31, 20x3, The effective interest rate is 16%, Renuiromon: Provide all the entries during the term ofthe noe, | 2. On January 1, 20x, J) Co. isues @ noninterestbearing mo, ‘of P3,000,00 in exchange for equipment. The note is due y three equal annual installments every December 31. Th, effective interest rate is 18%. Requirements: a. Compute for current and noncurrent portions of the noie payable on December 31, 20x1. b. Compute for the balance of discount, on note payable or December 31, 20x1 and determine how this amount is allocated to the current and noncurrent portions of the note. Provide all the entries during the term of the note payable. 3. On January 1, 20x1, Drive Co. paid cash of 200,000 ax¢ issued a noninterest-bearing note P2,000,000 in exchange fora Vehicle. The note is due in four equal annual installments. The 3 installment is due on January 1, 20x1 and the succeeds installments are due every 1* of January. The prevailing 1 of interest for this type of note is 12%. 89 je ap we rents ogi ace the journal entries. pein aba? I eng ame he ae oD 3, ow 2)? ip the inexperienced accountant of Alz-alipaw Co. ‘ verse the information required in the numbored blanks: o unt te notes payable on intial recognition (2) unt om ei of te note in YEAS) Payments Interest expense Amortization Present value ne 1119272 sini $00,000 179084) 898,356 fnows2 400,000 (6) 256268) ryuss 400,000 102735) 345,828 400000) 38,828, ° 5, The current and noncurrent portions of Baa-baa Cos note payable at the end of the 1* year are P213,534 and 507,016, respectively. The note is payable in four equal annual payments of P300,603 every December 31. Baa-baa Co. reported interest expense of P86,466 in the 2! year. The note ‘was initially recognized at P911,205 on Jan. 1 of Year 1. Requirement: Prepare a complete amo: ation table for the note. PROBLEM 4: MULTIPLE CHOICE - COMPUTATIONAL 1. On March 1, 20X4, Fine Co. borrowed P10,000 and signed a {wo-year note bearing interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, 20X6. What amount should Fine report as a liability for accrued interest at December 31, 20X5? Scanned with CamScannerHey - . 1,000 ©1320 ices 220 2. On January 1, 20s1, Sunset Co. issues a P5,000,000 noni bearing note due on December 31, 20x4. The effective ne a rate is 15%, How much is the umamorticed balan discount on notes payable account on January 1, 20337 a. 652,174 1219282 LIZA. 2a41 9, The next ico items are based om te following information: House Publishers offered a contest in which the winner jo receive 91,000,000, payable over 20 years. On December 31, ay House announced the winner of the contest and signed a nay payable to the winner for P1,000,000, payable in P50) installments every Janvary 2. Also on December 31, 2000, House purchased an annuity for P418,250 to provide the P950,000 rig monies remaining after the first 50,000 installment, which was paid on January 2, 2001. 3," In its December 31, 2000, balance sheet, what amount shoul House report as note payable-contest winner, net of curret portion? 2. 368,250 waicra) that An acuity 6 fan prod, wh eae an hte make lamp ram payment or Sc of panera, pm amare serene ent ncmepymets am the onsale 418,250 ¢. 900000 d.950,000 iso by ncn ntti he mare 4. In its 2000 income statement, what should House report * contest prize expense? a0 b. 418,250 .1,00008 «aera 468,250 squired a machine January 1, 208 ost ra ii 5. On January J, 20x1, RELISH TASTE Co. ac by issuing a 3%, 4,000,000 note due on Interest is payable semiannually. The effective inte! 12%. How much is the carrying amount of the note o7 recognition? . 3 ee eae anaes 4,000,000 4.3,174,309 63,135,340 don Dewember 30, 20N6, Barts Ine, purchased a machine fom On Corp. mexchany fora noninterest bearing note requiring Fal ements of 20,00. The frst payment was made on ce me ane oer eee mal per 40, At the date of issuance, the prevailing rate of for this type of note was 11%, On Bart's December 31, the note payable to Fell was . 104,620 6 interest gore balance sheet, 9.94240 wa 102,920 4.114.240 he oto information for Hr ext 0 questions ie fgned your skdics, passed the CPA board exams, and now 1. A veal estate company offered to sell you a house under an, in-house us You an accounta wiih a cash solling price of 14,000,000 Taoncng agreement. The amortization will be on 2 monthly basis riers petiod of25 years and the effective interes rate is 12%, You ie wondering if you can afford to purchase the house. You Gdimated your monthly expenditure to be P36,600, which included a risk adjustment allowance. ‘1. What should be the minimum balance of your monthly take- home salary so that you will be able to afford to purchase the house? a 147,451.38 b.148,051.98 ¢, 151,048.38 d, 184,051.38, eso Pe = OTRAS FV anna of oa SSH & How much is the total interest expense on the financing agreement? a. 30,235414 b. 23,335,216 20,235,414 4. 13,265,992 6 On January 1, 20x1, Next Co. obtains a P4,000,000 bank loan {ue on December 31, xd. Interest of 12% is due annually w bank charges Next Co, an 11.19% nonrefundable loan Scanned with CamScanner2 anna origination fee. The effective interest rate OM the jg, approximately equal to Gia epedou 16%. a. 11.19%. b. 12%, 49.17.3754, 10. On December 1, 20x5, Money Co. gave Home Co. a 299, 11% loan, Money paid proceeds Of P1200 afte, hy eduction of a 76000 orrefurdable 1097 Origination iN Principal and interest are 46", 60 monthly install P4310 beginning January 20x6. The repayments yigig effective interest rate of 11% af a present value of P200,09),8 432.4% at a present value of 7194,000. What amount of ey fom this loan should Hlome repor in its 2085 profit or logy ad b, 1,833 ©.2,005 4.7,833 (arcra) PROBLEM 5: (CLASSROOM. ACTIVITY World Corporation acquired a vehicle in exchange fr 2 note paya Details ae as follows: + Carmodel: 3.51 Expedition «Down payment: P318,000 + Monthly amortization (5 yes): 72,703 Platinum 4x4 AT (Year: 2017) “The vehicle has a cash price equivalent af P3,580,000 Requirements: Determine the following by preparing an amortzats table using Microsoft Excel ©: a. Effective interest rate . Total cash outflow on the acquisition of the vehicle ¢. Total interest expense over the term of the note: 4. Prepare the journal entry on initial recognition Solution Guide: Although itis possibeto solve the problem manwally casing onl en e| ‘and calcuatar), that would be very cumbersome. We wl 3 poe ace, it is more common that payments on financing ‘on a monthly basis rather than on an annual basis like secon a ein this book. Moreover, information on the effective ir readily available; you will need to determine this. ve access to a computer and open the Microsoft Excel © (cd 0 OY re made sus ine, get a fadings Headit8® sings on the amortization table that we are preparing. In ign B, row 3) type . In cell C3 (Le, clam C, row 3), ‘in D3 clntecest, in E3 and in F3 . This indicates the initial recognition (payment of down ames ns type corset BS then pes CTRL (peste “hy snwinet og poste "Dt hs he storia for dow) Beinn fst moth instaiment payment ove thc tothe blo gto el Bun he us into a small black cross. is Bounty om Dente ihe : ne ng down uni el BL cick the “AO Options” then select “Fill Series.” teftcikineraue Fi Scanned with CamScanner‘Althe number I's should turn into numbers 1 (0 60. Step 3 Payents cola In cell C5, type the down payment of <318000> inal! Cb, ype the monthly amortization amount of 2705, Cé then copy i eg. CTRLEC (press the “Ci” key and without regs Paattne key The edges fel C6 shoul tm nto "mareing nga Select cell C7. Press the “Shift” key and without releasing it res “down arrow” key oF the “Pg Dn” key to sclect cells C7 10 C65. Pate | copied cell or press CTRL+V. Cells C6 to C65 should be filled vp wt . Recall the concept that intrest is incur ‘when theres passoge of time 4 In cell DS, type the equal sign <->; select cell F5; type ast {ie multiplication oF Shit key then 8 key); then select B2. Place b&™| 95, yo vg and” the form, ten type te dla sign <> (Silt + 2 Beall 2a fined reference nthe formula, This allows vs yn asic i to other cells without changing the reference to wt ing oc a a 318000, 2 co 1 reveiw | ie press Enter. Copy cell D6 then paste it to cells D7 to D65 (see cepyingan pasting procedures Sey 39, Cells DS to DS wil have zeroes, 5: Amortization colun es type eal sign <>, slect cell C5 press minus sign, then select cell 2s Recall the concopt that the payment applied 0 the principal is total pment ss payment for interest RES —~E Month Payments Interest Amotisation resent value e a ar] imme Press Enter, Co should have is an. E cell E5 then paste it to cells E6 to E65. Cell ES 8 value of <318000> shile cells E6 to E65 should have values of Step 6: Present value column all 6 type the cash price of <3580000>, Enter In call 5, type equals hk gt: Pe equal sign, lel ctick cell FS, type minus sign then left Scanned with CamScanner———OOooor 3M VES a) e110 © bey S009 3 smeooo of sitoin/ es 2 om 07 Press enter. Copy cll FS then paste i 10 cells F6 10 F65, peg Ihave a value of <-1100180> hoy Step 7: Effective interest rate ‘we will determine the effective interest rate by using In this step, s Seek" function. Gy 1. Click the Data Menu Tab... (This one OF) fuses OS ERE ee res teBb es zeae cea 3. On the “Goal eek” dialogue box select “Set cel” delete any value then left click cell P65, Select “To value” then type zero <0>, Set changing cell” then left click cel B2. 1 Mom suasne aan amisooe 1 Thos ence soos sistemas 3 ios somes wossener 012030, 1 fo aueiae sent sentra {Tos aansn siemaar ssn & Thos sooo tense soem at $ Tan Somas ania anen sat 2 ho inoree ansaice motnean 40K" to dose the “Goal Seok Status” dialogue box. Luftclck tp 8 Ansivers to the other requirements Requirement (0: Total cash outflow Select cell C66. Fress "AutoSum’ on the Ribbon in the Home Tab. a Check if cells C5 to C65 are selected. Press enter. (IF yéu have essed enter, you can check your formula by pi 2 i your formula by pressing the F2 key or F2 key,) You should come up with total payments of 4,680,180, already Fulay Poet Tot ite Perform the in tparoret a Procedures in requirement (6) above on the interest column, You ould come uy 1p with total interest of 1,100,180. Scanned with CamScannerinital recognition ry on initia! ros Requirement: Jourtal et table a Ie our the amortization Ble. Thave gag Prepare the journal ent bel ‘enough guides already. O* te Step 9: Good job! we inte spor awesome Tips 0) eesti iMers rate 1. Make the table look aw» cal places: (b) the headings et in peroentage, rounds rary amounts are founded-of tg 2 iy bold letters: (@) the mom oe Sypeyeer efileand submit itt sat Pie the file YOU tea a. Fyeyournameinct At Pant fleand SBM 0 You agg ag, You wil be graded based on te of your ac conecess of yout oural entry. OF : PROBLEM 6: FOR CLASSROOM DISCUSSION Noninterest-bearing note ~ ump sum 1. On January 1, 20x, an entity issues a noninterest-bearing ny payable of 1,600,000 in exchange for land. The note is due” December 31, 20x3. The effective interest rate is17%, Requirement Provide al the enties during the term ofthe sy payable Noninterest-bearing note— installments 2 OnJanuary 1, 20x1, an entity issues a noninterest-bearing ni ‘of P1,200,000 in exchange for land. The note is due in the equal annual installments every December 31. The effecine interest rate is 17%. Requirements: a. Provide all the entries during the term of the note. b. Compute for the current and noncurrent portions of the nie ‘on December 31, 20x1 and the amount of “Discount on nots payable” allocated to each portion. Noninterest-bearing note - installment in advance 3. On January 1, 20x1, Otters Co. issued a 3-year, nonin bearing note of 1,200,000 in exchange for equipment. 99 ere equal annual installments beginning on 1 thereafter. The effective ts the amortization table. js the interest expense in 20x1? cn bthe carrying, amount of the note on Dec. 31, wien sepate ow aos? a payable~ Origination fees Loans aary 1, 20x1, Jaco Co. obtains a P3,000,000 bank loan 8 ang maturing on December 31, 20x3, The loan requires Gynt of 10% interest annually every December 31. The Pet charges Jaco Co. a 48057% nonrefundable loan aigination fee Requirements: Compute for the following: a, Cantying amount of the loan on January 1, 20x1 b. Effective interest rate on the loan Carrying amount of the loan on December 31, 20x1 Scanned with CamScanner