CHAPTER 8 NOTE PAYABLE Fair value option TECHNICAL KNOWLEDGE To define a promissory note. To know the initial measurement of note payable. To understand the subsequent measurement of note payable at amortized cost. To understand the fair value option of measuring note payable, To know the accounting for note payable issued solely for cash, interest-bearing note payable and noninterest-bearing note payable issued for property.NOTE PAYABLE A promissory note is an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain in money to order or to bearer. Initial measurement of note payable PFRS 9, paragraph 5.1.1, provides that_a note payable not designated at fair value through profit or loss 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 proht or loss, the transaction costs are expensed immediately. The fair value of the note payable is equal to the present value of the future cash payment to settle the note payable using market rate of interest. 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 The amortized cost of note payable is the amount at which the note payable is measured initially: Minus principal repayment Plus or minus the cumulative amortization using the effective interest method of any difference between the face amount and present value of the note payable. Actually, the difference between the face amount and present value is either discount or premium on the issue of note payable. 256Note issued solely for cash When a note payable is issued solely for cash, the present value is equal to the cash proceeds. On November 1, 2022, an entity discounted its own note of P1,000,000 at 12% for one year. Note payable 1,000,000 Discount (12% x 1,000,000) 120,000) Net proceeds 880,000 Journal entry Cash 880,000 Discount on note payable 120,000 Note payable 1,000,000 Actually, the discount on note payable of P120,000 is the total interest expense for one year. Thus, on December 31, 2022, after 2 months, the discount on note payable is amortized as interest expense. Interest expense 20,000 Discount on note payable 20,000 (120,000 x 2/12) The straight line method is used in amortizing the discount on note payable for simplicity: Besides, the note payable has only a term of one-year. On December 31, 2022, the note payable is classified and reported as current liability. Note payable _ 1,000,000 Discount on note payable (_ 100,000) Carrying amount 900,000 Observe that the discount on note payable is a direct deduction from the face amount of the note payable. The carrying amount of P900,000 is actually the amortized cost of the note payable.Interest bearing note issued for property hen a Property or noncash asset is acquired by issuing a promissory note which is interest bearing, the property or asset is recorded at the purchase price. The purchase price is reasonably assumed to be the present value of the note and therefore, the fair value of the property because the note issued is interest bearing. On January 1, 2022, an entity acquired an equipment for P1,000,000 payable in 5 annual equal installments every December 31 of each year. Interest is 10% on the unpaid balance. 2022 Jan. 1 Equipment 1,000,000 Note payable 1,000,000 Dec. 31 Interest expense (10% x 1,000,000) 100,000 . Note payable 200,000 Cash 300,000 Payment of the first installment and the interest for 2022. 2023 Dec. 31 Interest expense (10% x 800,000) 80,000 Note payable : 200,000 Cash 280,000 Payment for second installment and interest for 2023. Noninterest bearing note issued for property When a noninterest bearing note is issued for property, the property is recorded at the cash price of the property. The cash price is assumed to be the present value of the note issued. The difference between the cash price and the face amount of the note payable represents the imputed interest. The imputed interest is based on the sound philosophy that no lender would part away with his money or property interest-free. 258Illustration ~ noninterest bearing note On January 1, 2022, an entity acquired an equipment with a cash price of P350,000 for P500,000, P100,000 down and the balance payable in 4 equal annual installments. Journal entries for 2022 Jan. 1 Equipment 350,000 Discount on note payable 160,000 Cash 100,000 Note payable 400,000 Dec. 31 Note payable 100,000 - Cash 100,000 Payment of annual installment. 31 Interest expense 60,000 Discount on note payable 60,000 Amortization of the discount for 2022. Table of amortization Year Note payable Fraction Amortization 2022 400,000 4/10 60,000 2023 300,000 3/10 45,000 2024 200,000 2/10 30,000 2025 100,000 1/10 15,000 1,000,000 150,000 Note payable represents the amount outstanding every year. The note was issuéd on January 1, 2022 and the first payment was made on December 31, 2022: Thus, for 2022, the note payable outstanding is P400,000. Fraction is developed from the note payable outstanding every year. Amortization is the amount of discount multiplied by the fraction developed. Thus, for 2022, P150,000 times 4/10 equals P60,000. 1Another illustration - no cash price On January 1, 2022, an entity acquired an equipment for P1,000,000 payable in 5 equal annual installments on every December 31 of each year. Observe that there is no agreed interest and no cash price ig available for the equipment. In such a case, the cost of the equipment is equal to the present value of the P200,000 annual installments in 5 years at an appropriate discount rate of 10%. The discount rate of 10% is assumed to be the prevailing market rate of interest, The present value of an ordinary annuity of 1 for 5 years at 10% is 3.7908. ' Therefore, the present value of five P200,000 installments is P758,160, computed by multiplying P200,000 by the present Value factor of 3.7908. Journal entries:for 2022 Jan. 1 Equipment 758,160 Discount on note payable 241,840 Note payable 1,000,000 Dec. 31 Note payable 200,000 Cash . 200,000 First installment payment. 31 Interest expense 75,816 Discount on note payable 75,816 Amortization of the discount on note payable for 2022. The effective interest method is followed in the amortization of the discount. 260Table of amortization Date * Payment Interest Principal Present value Jan. 1, 2022 758,160 Dec. 31, 2022 200,000 75,816 124,184 633,976 Dec. 31, 2023 200,000 63,398 136,602 497,374 Dec. 31, 2024 200,000 49,737 150,263 347,111 Dec. 31, 2025 200,000 34,711 165,289 181,822 Dec. 31, 2026 — 200,000 18,178 181,822 Payment represents the annual installment. Interest is equal to the preceding present value multiplied by the implied interest rate. Thus, for 2022, P758,160 times 10% equals P75,816. Principal is the portion of the payment after deducting interest representing principal. Thus, on December 31, 2022, P200,000 minus the interest of P75,816 equals P124,184. Present value is the balance of the preceding present value after deducting the principal payment. Thus, on December 31, 2022, P758,160 minus the principal payment of P124,184 equals P633,976. On December 31, 2022, the current portion of the note payable should be reported as current liability. 7 Note payable 200,000 Discount on note payable (63,398) Carrying amount ~ amortized cost 136,602 The noncurrent portion of the note payable should be reported as noncurrent liability. Note payable 600,000 Discount on note payable ( 102,626) Carrying amount ~ amortized cost 497,374 261Noninterest bearing note payable lump sum On January 1, 2022, an entity acquired an equipment for P1,000,000. The entity paid P100,000 down and signed a noninterest bearing note payable for the balance which is due after three years on January 1, 2025. ‘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. Computation Downpayment . 100,000 Present value of note payable (P900,000 x .7513) 676,170 Cost of equipment 776,170 Imputed interest Face amount of note payable 900,000 Present value of note payable 676,170 Imputed interest 223,830 Journal entries 1. To record the purchase of equipment on January 1, 2022: Equipment 776,170 Discount on note payable 223,830 Cash 100,000 Note payable 900,000 2. To record the interest expense for 2022: Interest expense 67,617 Discount on note payable 67,617 The discount on note payable is amortized as interest expense using the effective interest method. 3. To record the full payment of the note on January 1, 2025: Note payable 900,000 Cash 900,000 262Table of amortization Discount on Date Interestexpense note payable Present value 1/1/2022 223,830 676,170 12/31/2022 67,617 156,218 743,787 12/31/2023 74,379 81,834 818,166 12/31/2024 81,834 - 900,000 Interest expense is equal to the preceding present value multiplied by the implied interest rate. Thus, for 2022, P676,170 times 10% equals P67,617. Discount on note payable is the balance minus the interest expense every year. Thus, on December 31, 2022, P223,830 minus the interest of P67,617 equals P156,213. Present value is the preceding balance plus the interest expense every year. Thus, on December 31, 2022, P676,170 plus the interest of P67,617 equals P743,787.Fair value option of measuring note payable 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. PFRS 9, paragraph 5.7.7, provides that the gain or loss on financial liability designated at fair value through profit or loss shall be recognized either in other comprehensive income or profit or loss. a. The change in fair value attributable to the credit risk is recognized in other comprehensive income. Credit risk is the risk that the issuer of the liability would cause a financial loss to the other party by failing to discharge the obligation, Credit risk does not include market risk such as interest risk, currency risk and price risk. b. The remaining amount of the change in fair value is recognized in profit or loss. Application Guidance B5.7.9 provides that amount recognized in other comprehensive income resulting from change in fair value attributable to credit risk shall not be subsequently transferred to profit or loss. However, the cumulative gain or loss recognized may be transferred directly to retained earnings. Under the fair value option, any transaction cost is recognized as outright expense. There is no amortization of discount and premium on note payable. As a matter of fact, interest expense is recognized.using the nominal or stated interest rate. 264Illustration On January 1, 2022, an entity b df a : E y borrowed from a ban P4,000,000 on a 12% 5-year interest bearing note. The entity received P4,000,000 which is'the fair value of the note on January 1, 2022. Transaction cost of P100,000 was paid by the entity. The fair value of the note payable was P3,500,000 on December 31, 2022. The entity has elected irrevocably the fair value option for measuring the note payable. The change in fair value comprised P50,000 attributable to credit risk and P450,000 attributable to interest risk. Journal entries for 2022 Jan. 1 Cash 4,000,000 Note payable 4,000,000 it 100,000 a cost 100,000 Dec. 31 Interest expense (12% x 4,000,000) 480,000 Cash 480,000 31 Note payable 500,000 Gain from change in fair value 450,000 Gain from credit risk — OCI 50,000 Carrying amount 4,000,000 Fair value — December 31, 2022 3,500,000 Decrease in fair value of liability — gain 500,000 The gain from change in fair value is recognized in profit or loss. The gain from credit risk is recognized in other comprehensive income. 265QUESTIONS 1. Define a promissory note. 2. Explain the initial and subsequent measurement of note payable. 3. Explain the amortized cost of note payable. 4. What is the present value of a note payable? a. Note issued solely for cash b. Interest bearing note issued for property c. Noninterest bearing note issued for property 5. Explain the fair value option of measuring the note payable.PROBLEMS Problem 8-1 (IAA) Ontario Company, a natural energy supplier, borrowed P8,000,000 cash on November 1, 2022 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. 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, 2022. 3. Prepare the journal entry for the payment of the note payable at maturity. Problem 8-2 (IAA) On October 1, 2022, Home Company issued to Security Bank a P6,000,000, 8-month, noninterest-bearing note. The note payable was discounted by the bank at 12%. Required: 1. Prepare the appropriate journal entry by Home Company to record the issuance of the note. Prepare the adjusting entry on December 31, 2022. Present the note payable on December 31, 2022. Prepare the journal entry to record the discount amortization and payment of the note payable on June 1, 2023, date of maturity. 5. Prepare the journal entry to record the following assuming the note had been structured as a 12% note with interest and principal payable at maturity: Aw a. Issuance of the note payable on October 1, 2022 b. Accrued interest payable on December 31, 2022 c. Payment of the note payable on the date of maturity 267Problem 8-3 (IAA) On September 1, 2022, Trinoma Entertainment borrowed P24,000,000 cash to fund a new Fun Park. ‘The loan was granted by Solid Bank under a noncommitted short-term line of credit arrangement. Trinoma issued a 9-month, 12% promissory note. Interest was payable at maturity. The fiscal period is the calendar year. Required: 1. Prepare the journal entry for the issuance of the note by Trinoma. 2. Prepare the appropriate adjusting entry for the note on December 31, 2022. 3. Prepare the journal entry for the payment of the note at maturity. Problem 8-4 (IAA) Rose Company provided the following selected transactions related to liabilities: 2022 Feb. 1 Negotiated a revolving credit agreement with Second Bank which can be renewed annually upon bank approval. The amount available under the line of credit is P30,000,000 at the prime bank rate. April 1 Arranged a 3-month bank loan of P12,000,000 with Second Bank under the line of credit agreement with interest rate of 8% payable at maturity. July 1 Paid the 8% note at maturity. Nov. 1 Supported by the credit line, Rose Company issued P20,000,000 of commercial paper on a nine-month note. Interest was discounted at issuance at a 6% discount rate. Dec. 31 Recorded any necessary adjusting entry. 2023 Aug. 1 Paid the commercial paper at maturity. Required: Prepare the appropriate journal entries through the maturity of each liability.Problem 8-5 (ACP) On January 1, 2029, da tract of land for P1,000,006, , West Company acquired a of lan 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, 2024, Required: Prepare journal entries to record: 1. Purchase of land on January 1, 2022 2. Accrued interest on December 31, 2022 3. Accrued interest on December 31, 2023 4. Full payment of the note on January 1, 2024 Problem 8-6 (ACP) On January 1, 2022, North Company acquired a machinery with cash price of P750,000 for P1,000,000. \ The entity paid 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. Required: Prepare journal entries for 2022. Problem 8-7 (IAA) On January 1, 2022, South Company acquired a building for P5,000,000. 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. Required: Prepare journal entries to record purchase of building on January 1, 2022, first installment payment on December 31, 2022 and interest expense for 2022. 269Problem 8-8 (IAA) C tract of land On January 1, 2022, Manila Company acquired a i for P5,250,000. The entity paid P1,250,000 down and signed a noninterest bearing note payable for the balance due on January 1, 2025. There was no established exchange price for the land a the note had no ready market. The prevailing in Fairer ik for this type of note was 12%. The present value o for 3 periods is .7118, Required: . : January Prepare journal entries to record purchase of land on 1, 2022, interest expense for 2022 and full payment of the note on January 1, 2025, Problem 8-9 (AICPA Adapted) On January 1, 2022, Heritage Company had a note payable to bank in the amount P2,800,000. Transactions during 2022 and other information relating to liabilities are: a. Principal amount of the note payable to bank is P2,800,000 and bears a 12% interest. The note is dated April 1, 2021 and is payable in four equal annual installments beginning April 1, 2022. The first principal and interest payment was made on April 1, 2022. b. On July 1, 2022, the entity issued for P1,774,000 a Eee face amount note payable to a wealthy shareholder. The note was dated July 1, 2022 and matures on July 1, 2023. No explicit interest rate is stated in the note and the entire face amount of the note is payable at maturity date. Required: a. Prepare journal entries for 2022. b. Compute the total current liabilities on December 31, 2022. c. Determine the interest expense for 2022. 270Problem 8-10 (AA) Joshua Company bought a new machine and agreed to pay in equal annual installment of P600,000 at the end of each of the next five years, The prevailing interest rate for this type of transaction is 12% The present value of an ordinary annuity of 1 at 12% for five periods is 3.60. The future amount of an ordinary annuity of J at 12% for five periods is 6.35. The present value of 1 at 12% for five periods is 0.567. 1. What amount should be reported as noe payable if financial statements were prepared today? 1,700,000 2,160,000 3,000,000 3,810,000 Be op 2. What amount should be reported as interest expense for the first year? a. 259,200 b. 187,200 c. 360,000 d. 457,200 Problem 8-11 (AICPA Adapted) Mann Company reported a 10% note payable of P3,600,000 on June 30, 2022. The note is dated October 1, 2020 and payable in three equal annual payments of P1,200,000 plus interest. The first interest and principal payment was made on October 1, 2021. On June 30, 2022, what amount should be reported as accrued interest payable for this note? a. 270,000 b. 180,000 ic: 90,000 d. 60,000 271Problem 8-12 (AICPA Adapted) sed a machi; On December 31, 2022, Bart Company TE rant boats from Fell Company in exchange ee of P200,000. note payable requiring eight payments , 2022 and ¢] The first payment was made on December 31, the others are due annually on December 31. Fs terest for thi, At date of issuance, the prevailing rate of inte hig type of note was 11%. 5.146 PV ofan ordinary annuity of 1 at 11% for 8 ees fa 511 PV of an annuity of 1 in advance at 11% for 8 P' On December 31, 2022, what is the carrying amount of the note payable? a. 1,142,400 b. 1,029,200 ec. 1,046,200 d. 942,400 Problem 8-13 (AICPA Adapted) borr At the beginning of current year, Pares rotty a wonintee P3,600,000 from a major customer enone bearing note payable due in three year’ 's i tory nee The entity agreed to supply the custom d achat e for the loan period at an amount lower / hhis type of loan, the At the 12% imputed interest rate for # 4 present value of the note is P2,550,000 at the date of issuance, ted for What amount of interest expense should be repor' the current year? a. 432,000 b. 350,000 ¢. 306,000 d. 0 272Problem 8-14 (AICPA Adapted) At year-end, Roth Co, issued a P1,000,000 face amount note payable in exchange. ‘for services rendered. The note payable, m, al trade terms, is due in nine months and bears intereer payable at maturity, at the annual rate of 3%, : The market interest rate is 8%. The compound interest factor of 1 due in nine months at 8% is .944. At what amount should the note payable be reported at year-end? a. 1,030,000 b. 1,000,000 c. 965,200 d. 944,000 Problem 8-15 (AICPA Adapted) Fi nn 7 i te payable September 1, 2021, Pine Company issued a no’ nee of P1,800,000, bearing ae = ee a payable in three equal annual principal’ f y. P600,000. On this date, the prime rate wa ? The first interest and principal payment was made on September 1, 2022. On December 31, 2022, what amount should be reported as accrued interest payable? a. 44,000 b. 48,000 c. 66,000 d. 72,000 Problem 8-16 (AICPA Adapted) On March 1, 2021, Alpha Company borrowed P1,000,000 and signed a 2-year note payable bearing interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28, 2023. What amount should be reported as accrued interest payable on December 31, 2022? a. 100,000 b. 120,000 c. 232,000 d. 240,000Veoblon W17 (LAAy On danuny 1, 2022, Hotomn Company sold land to Glory Company. Mere wie io established market price for the land Glory Company qave Solemn Company 6 2,400,000 honititereat boating note payable in three equal annual inetallnente of PHO0,000 with the first payment due Dovwmber (1, yoy ‘Nhe note had no ready market, The prevailing rate of interest for a tote of this type is LOM, The present value of a 12,400,000 note payable in three equal AO NUAT installments of PAOO,000 Ht a 10% rate of interoat is V1.902,000, What is the carrying amount of the note payable on Devember at, zogg'r a. 1,902,000 hb. 1,194,000 6 LYOt,200 1,600,000 Problom 8-18 (AICPA Adapted) On January 1, 2022, Basy Company reported a note payable of 21,200,000, ‘The note is datod October 1, 2021, bears interest at 15%, and in payablo in three equal annual payments of P400,000. ‘Tho first intorest and principal payment was made on October 1, 2022 What amount should be reported as interest expense for 20227 a. 165,000 b. 180,000 c 135,000, d 30,000Problem 8-19 (AICPA Adapted) Loob Company fre. he bank in ordi ms quently borrowed from the bai er to maintain sufficient operating cash. The loans were at a 12% interest rate, with interest payable at maturity. The entity recorded interest expense when the loans are repaid, As a result, interest expense of P160,000 was recorded in 2022. The entity repaid each loan on the scheduled maturity date. Date Amount Maturity Term 11/1/2021 500,000 10/31/2022 lyear 2/1/2022 1,500,000 7/31/2022 6 months 5/1/2022 800,000 1/31/2023 9 months Jf no correction is made, by what amount would interest expense for 2022 be understated? a. b. 62,000 c. d. Problem 8-20 (AICPA Adapted) Jason Company offered a contest in which the winner would receive P1,000,000 payable over twenty years. On December 31, 2022, Jason Company announced the winner of the contest and signed a note payable to the winner for P1,000,000 payable in P50,000 installments every January 31. On December 31, 2022, Jason Company purchased an annuity for P418,250 to provide the P950,000 prize remaining after the first P50,000 installment which was paid on January 31, 2023. On December 31, 2022, what amount should be reported as note payable-contest winner, net of current portion? 468,250 418,250 900,000 950,000 Boop 275Problem 8-21 (AICPA Adapted) On September 30, 2023, World Company °° CF four quarterly os SR race the caus pad coe SE payments of P264,200 when due on expense for 2023) 1. What amount should be reported as interest a. 90,000 b. 22/500 ec. 67,500 d. 30,000 2. On December 31, 2023, what the note payable? a. 758,300 b. 750,000 c. 825,800 d. 735,800 Problem 8-22 (AICPA Adapted) en On Japan 209, arcane at Os DMS on a 10% five-year interest-bear rte. Sea eS Oe, 2022, the fair value of the note is determined to be 0,006 e fair value option in t is the carrying amount of The entity irrevocably elected tht measuring the note payable. 1. What amount should be reported as interest a. 100,000 b. 200,000 c. 190,500 d. 150,750 2. What is the carrying December 31, 2022? a. 2,000,000 b. 1,900,000 c. 950,000 d. 900,000 3. What amount should be reporte change in fair value of the note P a. 100,000 gain b. 100,000 loss ec. 150,000 gain d. 150,000 loss 4. Prepare journal entries for 202% expense for 2022? amount of the note payable on das gain or loss from ayable for 2022? 276problem 8-23 (AICPA Adapted) On January 1, 2022, Davao Company borrowed 4,000,000 on 2.6% 4-year interest bearine note. The net proceeds from the borrowing amounted 600, Interest is payable annually every December hn ‘The entity elected the faj option. On December 31- 2022, the bonds are amoted a ” 3. What amount s| 240,000 120,000 294,208 220,256 peop ve What amount should be reported as gain or loss from change in fair value for 29940 peop 3. What is the carrying amount of the note payable on December 31, 20297 3,677,600 3,800,000 3,493,720 4,000,000 Bo gp 4. Prepare journal entries for 2022. Asa Mlle , Abs.Problem 8-24 (IAA) On January 1, 2022, Katniss Company borrowed P9,000,000 on a 10% three-year interest-bearing note. aa interest ie from the borrowing amounted to P5,000,000. payable annually every December 31. . Sant ing the not The entity elected the fair value option in measuring the note payable. On December 31, 2022 and 2023, the risk factors indicated that the rate of interest applicable to the no’ 12% respectively. PV of 18% 4 periods . sre PV of an ordinary annuity of 18% 4 periods 0.712 PV of 1 12% 3 periods 2.402 PV of an ordinary annuity of 1 12% 3 periods : 1. What amount should be reported as interest expense for 2022? a. 533,100 b. 500,000 c. 250,000 - d. 600,000 2. What amount should be reported as gain or loss from change in fair value for 2022? a. 400,000 gain b. 400,000 loss c. 331,000 loss d. 331,000 gain 3. What amount should be reported as gain or loss from change in fair value for 2023? a. 570,000 gain b. 570,000 loss c. 239,000 gain d. 239,000 loss 4. Prepare journal entries for 2022 and 2023. 278Problem 8-25 Multiple choice (AICPA Adapted) 1. When an en: for cash, the is equal to tity issued a note payable solely in exchange Present value of the note payable at issuance a. Face amount b. Pace amount discounted at the prevailing interest rate c. Proceeds received d. Proceeds received discounted at the prevailing interest rate 2. If the present value of a note payable issued in exchange for a property is less than face amount, the difference should be a. Included in the cost of the asset b. Amortized as interest expense over the life of the note c. Amortized as interest expense over the life of the asset d. Included in interest expense in the year of issuance ° . An entity borrowed cash from a bank and issued to the bank a short-term noninterest bearing note payable. The bank discounted the note at 10% and remitted the proceeds to the entity. The effective interest rate paid by the entity in this transaction would be a. Equal to the stated discount rate of 10% b. More than the stated discount rate of 10% c. Less than the stated discount rate of 10% d. Independent of the stated discount rate of 10% a At issuance date, the present value of a promissory note is equal to the face amount if the note a. Bears a stated rate of interest which is realistic. b. Bears a stated rate of interest which is less than the pervailing market rate for similar notes. c. Is noninterest bearing and the implicit interest rate is less than the prevailing market rate for similar notes. d. Is noninterest bearing and the implicit interest rate is equal to the prevailing market rate for similar notes. 279a vl e 5. x Which statement concerning discount on note payable is incorrect? a. Discount on note payable may be debited when entity discounts its own note with the bank. oa b. The discount on note payable is a deduction trom the face amount note payable. ' ce. The discount on note payable ee interest charges applicable to future periods. d. Amortizing the discount on note payable a decreases the carrying amount of the liability over the life of the note. When a note payable with no ready market is saan for property whose fair value is currently indeterminable a. The present value of the note payable must be approximated using an imputed interest rate. b. The note payable should not, be recorded until the fair value of the property becomes evident. c. The entity receiving the property should estimate a value for the property. d. Both entities involved in the transaction should negotiate a value to be assigned to the property. . When a note payable is issued for property. the present value of the note is measured by a. The fair value of the property b. The fair value of the note payable c. Using an imputed interest rate to discount all future payments on the note payable d. All of these are considered in measuring the present value of the note payable . When a note payable is exchanged for property, the stated interest rate is presumed to be fair when a. No interest rate is stated. b. The stated interest rate is unreasonable. c. The face amount of the note is materially different from the cash sale price for similar property. d. The stated interest rate is equal to the market rate. 2809, The 10. discount resulting from the determination of the present value of a note payable should be reported as a. b. c. d Deferred credit Direct deduction from the face amount of the note Deferred charge Addition to the face amount of the note Which statement is correct when an entity issued a note payable with no stated interest rate in exchange for a depreciable asset? a. b. & d. The asset should be depreciated over the term of the note payable. If fair value is unavailable, the note payable should be recorded at present value discounted at the market rate of interest. Both the note and the asset are recorded at the face amount of the note payable. The note payable ‘is recorded at face amount even if the fair value of the asset is readily available. 281