ACTIVITY: NOTES PAYABLE

DEADLINE: April 13, 2023 (Thursday) during our class schedule

Problem 1

On January 1, 2017, a customer purchased a new P25,000 automobile, making a downpayment

of P1,000. The customer signed a note indicating that the annual interest rate of interest would
be 8% and that quarterly payments would be made over 3 years. For the first year, Pretty Feet
required a P300 quarterly payment to be made on April 1, July 1, October 1, and January 1,
2018. After this one-year period, the customer was required to make regular quarterly
payments that would pay off the loan as of January 1, 2019.

Required:
(a) Prepare a note amortization schedule for the first year.
(b) Indicate the amount the customer owes on the contract at the end of the first year.

(c) Compute the amount of the new quarterly payments.

Problem 2

On July 1, 2018, ABC Company borrowed P1,000,000 on a 10% five-year note payable. On
December 31, 2018, the fair value of the note is determined to be P975,000 based on market
and interest factors. The entity has elected the fair value option for reporting the financial
liability.

Compute the following and show your solution: a. Interest expense for 2018

b. carrying amount of the note payable on December 31, 2018

c. gain or loss to be recognized in 2018 as a result of the fair value option d. discount on note
payable presented on December 31, 2018

Answers:

1. 10% x 1,000,000 x 6/12 = 50,000 for 6 months from July 1 to Dec 31, 2020 under the fair
value option any premium or discount on note payable will not have an effect on interest
expense.
2. 975,000 if fair value option is elected the note is presented at present value every year end
with changes in fair reported in profit or loss.

Note payable 25,000

Gain on note payable (1,000,000-975,000) 25,000

3. 25,000

Problem 3

On July 1, 2021, ABC Co. borrowed P1,000,000 and issued a one-year note payable. The lender
discounted the note at 12%.

Prepare all the necessary journal entries under the following scenarios:
a. The note is due on lump sum on June 30, 2022. The effect of discounting is immaterial.

b. The note is due in equal quarterly installments starting September 20, 2021