Chapter 8

NOTE PAYABLE
Intermediate Accounting 2
JIMELYN H. EVANGELISTA, CPA, MBA
COURSE OUTCOMES:
the students should be able to:
✓ Define note payable.
✓ Understand the initial measurement
and subsequent measurement of
note payable.
✓ Apply proper accounting for note
payable issued solely for cash,
interest-bearing note payable and
non-interest bearing note issued for
property.
PROMISSORY NOTE
➢ An unconditional promise in writing
made by one person known to
another, signed by the maker,
engaging to pay on demand or at a
fixed determinable future time a sum
certain in money to order or to
bearer.
INITIAL MEASUREMENT
❑ Notes Payable not designated at FV
through P/L shall be measured
initially at fair value minus direct
transaction costs.

❑However, if the note payable is

irrevocably designated at FV trough
P/L, the transaction costs are
expensed immediately.
SUBSEQUENT MEASUREMENT

❑ Amortized cost using the

effective method

❑ At fair value, if the note is

designated irrevocably as
measured at FV through P/L
AMORTIZED COST

❑ Amount at which the note payable is

measured initially

❑ Minus principal payment

❑ Plus or minus the cumulative amortization

using the effective interest method of any
difference between the face amount and
the present value of the note payable
(discount or premium)
NOTE ISSUED SOLELY FOR CASH
On November 1, 20x0, an entity discounted its own
note of P100,000 at 12% for one year.

Present value = Cash Proceeds

Cash 88,000
Discount on note payable 12,000
Note payable 100,000
NOTE ISSUED SOLELY FOR CASH
On December 31, 20x0, after 2 months, the discount is
amortized as interest expense:

Interest expense 2,000

Discount on Note payable 2,000

The straight-line method is used for

simplicity. Besides the note payable has
only a term of one year.
INTEREST-BEARING NOTE ISSUED FOR PROPERTY

Present value = Purchase price (or the FV)

On April 1, 20x0, an entity acquired

an equipment for P500,000 payable in 5
annual equal installments every April 1
of each year. Interest is 10% on the
unpaid balance.
 INTEREST-BEARING NOTE
20x0:
Apr. 1 Equipment 500,000
Note payable 500,000

Dec. 31 Interest expense 37,500

Interest payable 37,500
20x1:
Jan. 1 Interest payable 37,500
Interest expense 37,500

Apr. 1 Interest expense 50,000

Note payable 100,000
Cash 150,000
 Non-Interest Bearing Note Issued for Property

Present value = Cash price

On January 1, 20x0, an entity

acquired an equipment with a cash price
of P70,000 for P100,000, P20,000 down
and signed a noninterest bearing note
for the balance payable in 4 equal annual
installments every December 31.
 Non-Interest Bearing Note Issued for Property
Amortization Schedule:

Note Fraction Amortization

payable

Yr. 1 80,000 8/20 12,000

Yr. 2 60,000 6/20 9,000

Yr. 3 40,000 4/20 6,000

Yr. 4 20,000 2/20 3,000

200,000 30,000
 Non-Interest Bearing Note
20x0:
Jan. 1 Equipment 70,000
Discount on note payable 30,000
Note payable 80,000
Cash 20,000

Dec. 31 Note payable 20,000

Cash 20,000

Interest expense 12,000

Discount on note payable 12,000
 Non-Interest Bearing Note Issued for Property

No Cash price
On January 1, 20x0, an entity
acquired an equipment for P100,000,
P20,000 down and signed a noninterest
bearing note for the balance payable in
4 equal annual installments every
December 31. The prevailing interest
rate for this type of note was 10%.
NON-INTEREST BEARING NOTE (Installment)

Face of the Note 80,000

Present Value of the Note
(20,000 x 3.170) 63,400
Discount on note payable 16,600

PV of the note 63,400

Cash down payment 20,000
Cost Equipment 83,400
 Non-Interest Bearing Note
Amortization Schedule: Effective Interest method

Date Annual Interest Principal Present

payment value
Jan. 01, x0 63,400
Dec. 31, x0 20,000 6,340 13,660 49,740
Dec. 31, x1 20,000 4,974 15,026 34,714
Dec. 31, x2 20,000 3,471 16,529 18,185
Dec. 31, x3 20,000 1,815 18,185 -
 Non-Interest Bearing Note
20x0:
Jan. 1 Equipment 83,400
Discount on note payable 16,600
Note payable 80,000
Cash 20,000

Dec. 31 Note payable 20,000

Cash 20,000

Interest expense 6,340

Discount on note payable 6,340
 FINANCIAL STATEMENT PRESENTATION
On December 31, 20x0:
Current Liability:
Face of the Note payable 20,000
Discount on Note payable 4,974
Carrying amount – amortized cost 15,026

▪ Noncurrent Liability:

Face of the Note payable 40,000

Discount on Note payable 5,286
Carrying amount – amortized cost 34,714
 NON-INTEREST BEARING NOTE ISSUED FOR PROPERTY

Lump sum (No Cash price)

On January 1, 20x0, an entity
acquired an equipment for P100,000,
P20,000 down and signed a noninterest
bearing note for the balance which is
due after four years. There was no
established cash price for the
equipment. The prevailing interest rate
for this type of note was 10%.
 NON-INTEREST BEARING NOTE ISSUED FOR
PROPERTY (Lumpsum)
Face of the Note 80,000
PV of the Note (80,000 x 0.683) 54,640
Discount on note payable 25,360

PV of the note 54,640

Cash down payment 20,000
Cost Equipment 74,640
 NON-INTEREST BEARING NOTES PAYABLE

Amortization Schedule: Effective Interest method

Date Interest Discount Present

on note value
payable
Jan. 01, x0 25,360 54,640
Dec. 31, x0 5,464 19,896 60,104
Dec. 31, x1 6,010 13,886 66,114
Dec. 31, x2 6,611 7,275 72,725
Dec. 31, x3 7,275 0 80,000
NON-INTEREST-BEARING NOTE
20x0:
Jan. 1 Equipment 74,640
Discount on note payable 25,360
Note payable 80,000
Cash 20,000

Dec. 31 Interest expense 5,464

Discount on note payable 5,464
20x3
Interest expense 7,275
Discount on note payable 7,275

Note payable 80,000

Cash 80,000
 DISCOUNTING
NOTE PAYABLE WITHOUT RECOURSE
(FAIR VALUE OPTION)

PFRS 9 - at initial recognition, note payable may be

irrevocably designated as at fair value through profit/ loss.
The gain or loss should be accounted for as follows:

❑ The change in FV attributable to credit risk is

recognized in other comprehensive income.
Credit risk
➢ the risk that the issuer would cause a financial loss to
the other party by failing to discharge the obligation.
➢ does not include market risk such as interest risk,
currency risk and price risk.

❑ The remaining amount of the change in fair value is

recognized in profit or loss
 NOTEDISCOUNTING WITHOUT
PAYABLE (FAIR RECOURSE
VALUE OPTION)

✓ amount recognized on OCI resulting from change in

FV attributable to credit risk shall not be
subsequently transferred to profit or loss

✓ However cumulative gain or loss recognized may be

transferred within equity or retained earnings.

✓ Any transaction cost is recognized as outright

expense.

✓ There is no amortization of discount and premium on

note payable
✓ Interest is recognized using the nominal or stated
interest rate.
 NOTE PAYABLE (FAIR VALUE OPTION)

On January 1, 20x0, an entity borrowed from

a bank P2,000,000 on a 12% 5-year interest
bearing note. The entity received P2,000,000
which is the fair value of the note. Transaction cost
of P50,000 was paid by the entity. The fair value of
the note payable was P1,750,000 on December
31, 20x0. The entity elected irrevocably the fair
value option for measuring the note payable. The
change in FV comprised P25,000 attributable to
credit risk and P225,000 attributable to interest
risk.
FAIR VALUE OPTION
20x0:
Jan. 1 Cash 2,000,000
Note payable 2,000,000
Transaction cost 50,000
Cash 50,000
Dec. 31 Interest expense 240,000
Cash 240,000

Note payable 250,000

Gain from change in fair value 225,000
Gain from credit risk – OCI 25,000
NOTES PAYABLE

end
of
Chapter 8