NOTES PAYABLE

(Summary)

ACCOUNTING FOR NOTES PAYABLE

The accounting for notes payable will depend on the following:

1. Short-term or long-term notes payable
2. Interest-bearing or non-interest bearing notes payable
3. Lump-sum payment or installment payment
4. Designated at FVPL or not designated at FVPL

The maturity date of long-term notes payable is more than a year, whereas that of
short-term notes payable is one year or less. Furthermore, long-term notes payable take
the time worth of money into account, whereas short-term notes payable do not.

Interest on interest-bearing notes payable is due on the maturity date or on a regular

basis, in accordance with the payment schedule for long-term notes payable.
Interest-bearing notes compute interest expense at the stated rate or nominal rate;
notes that do not bear interest factor in the effective interest rate.

When notes payable are paid in whole, the principal must only be paid once at the end
of the notes' maturity period. Installment payment of notes payable calls for the periodic
payment of the principle, or face amount, on a set schedule, such as a yearly basis.
This will result in a yearly decrease in interest expenses.

INITIAL MEASUREMENT OF NOTES PAYABLE

The initial measurement of notes payable will depend if the notes payable is designated
at fair value through profit or loss (FVPL) or not.

1. Notes Payable not designated at fair value through profit or loss (FVPL)
• PFRS 9, paragraph 5.1.1, provides that a note payable not designated at FVPL shall
be measured at fair value
minus transaction costs that are directly attributable to the issue of the notes payable.
• Transaction costs are included in the measurement of notes payable.
2. Notes Payable designated at fair value through profit or loss (FVPL)
• If the notes payable is irrevocably designated at fair value through profit or loss
(FVPL), the transaction costs
are expensed outright.

Computation of fair value or market price of notes payable, if not given the fair value of
the notes payable is equal to the present value of future cash payment to settle the note
payable using the market rate of interest:

SUBSEQUENT MEASUREMENT OF NOTES PAYABLE

PFRS 9, paragraph 5.3.1, provides that after initial recognition, a note payable shall be
measured:

1) Not designated at FVPL

▪ At amortized cost using the effective interest method
Statement of Financial Position:

Notes Payable (at face amount) xxx

Less: Discount on notes payable xxx
Carrying amount xxx

Other Expenses:
Interest Expense xxx

2) Designated irrevocably at FVPL

▪ At fair value through profit or loss
Statement of Financial Position:

Notes Payable (at fair value) xxx

Income Statement: Other Income:
Gain from change in fair value. xxx
Other Expenses:
Loss from change in fair value. xxx

CLASSIFICATIONS OF ACCOUNTING PROBLEMS FOR NOTES PAYABLE

The following are the common types of problems regarding notes payable:
1. Note issued solely for cash
a) Interest-bearing
b) Noninterest-bearing
2. Note issued for noncash items
a) Interest bearing note
b) Noninterest bearing note
A. Cash price is given
B. Cash price is not given
C. Lumped price
D. Installment