Module 8: Note Payable

Answer Key

1. C. Proceeds received
2. B Amortized as interest expense over the life of the note
3. B. More than the stated discount rate of 10%
4. A. Bears a stated rate of interest which is realistic.
5. D. Fair value minus transaction cost
6. C. Either amortized cost or fair value through profit or loss
7. D. Fair value
8. B. at initial recognition, an entity may irrevocably designate the note payable as a fair value
9. D. Amortizing the discount on note payable gradually decreases the carrying amount of
liability over the life of the note.
10. A. The present value of note payable must be approximately using an imputed interest rate
11. D. All of these are considered in measuring the present value of the note payable
12. D. The stated interest rate is equal to the market rate
13. B. Direct deduction from the face amount of note
14. B. If fair value is unavailable, the note payable should be recorded at present value
discounted at the market rate of interest
15. D. fair value minus transaction cost

PROBLEM SOLVING

1. A 2,450,000 gain

Note Payable 5,000,000

Net Proceeds 2,550,000
Gain in change in fair value 2,450,000

2. D 71,000

Jan 1 - Oct 31, 2023 (400k x 12% x 10/12) 40,000

Feb 1 - Jul 31, 2023 (1M x 12% x 6/12) 60,000
May 1 - Dec 31, 2023 (700k x 12% x 8/12) 56,000
Total interest Expense- 2023 156,000
Recorded interest expense (85,000)
Understatement of Interest Expense 71,000

3. B 2,520,000

Present Value (700k x 3.60) 2,520,000

4. C 302,400

Interest Expense (2,520,000 x 12%) 302,400

5. B 48,000

Note Payable, 09/22 1,800,000

Less: Payment - 09/23 600,000
Balance - 09/23 1,200,000

Accrued Interest Payable 09/23 (1,200,000 x 4/12) 48,000

6. A 300,000

Interest Expense (3,000,000 x 10%) 300,000

7. D 2,500,000

Carrying amount of Note Payable 2,500,000

8. A 500,000 gain

3,000,000 - 2,500,000 = 500,000

9. C 20,250

Interest Expense (900,000 x 9% x 3/12) 20,250

10. A 704,700

Note Payable 900,000

Payment 195,300
Carrying Amount 704,700

11. D 1,391,200

Note Payable 2,400,000

Present Value 1,992,000
Discount on Note Payable 408,000
Amortization for 2023 (1,992,000 x 10%) 199,200
Discount on Note Payable 0 12/31/23 208,800
Note Payable - 01/01/23 2,400,000
Annual Payment (800,000)
Note Payable - 12/31/23 1,600,000
Discount on Note Payable (208,800)
Carrying Amount 1,391,200

11. D 165,000

1,200,000
(400,000)
800,000

Interest Paid 01/09 (1,200,000 X 15% X 9/12) 135,000

Interest Accrued 10/12 (800,000 x 15% x 3/12) 30,000
Interest Expense 165,000

12. A 1,160,000

Accrued Interest 03/2022 - 02/2023 (5M X12%) 600,000

Accrued Interest 03/2023 - 12/2023 (5M + 600k X 12% X 10/12) 560,000
Total Accrued Interest Payable 12/31/2023 1,160,000

13. B 414,000

Interest Expense (12% x 3,450,000) 414,000

14. C 471,200

PV of Note Payable (100,000 x 5.712) 571,200

Payment, 12/2023 (100,000)
Balance 12/2023 471,200

15. D 180,000

Note Payable, 10/2023 2,400,000

Payment on October 2022 (800,000)
Balance, 10/2022 1,600,000

Accrued Interest Payable from

October 2022 - June 2023 (1,600,000 x 10% x 9/12) 180,000