CHAPTER 2: NOTE PAYABLES ¿¿¿

Press 1.12 division sign (2x) then equal sign for the
number of years. Then minus 1 and equal. Lastly, divide
Notes payable “are obligations supported by debtor the rate
promissory notes.”
6. Present value of an annuity due
Initial measurement: Fair value minus transaction cost ¿¿¿
CLASSIFICATION and MEASUREMENT:
Press 1.12 division sign (2x) then equal sign for the
TYPE Initial Subsequent number of years (minus 1) . Then minus 1 and equal.
Short-term payable Face amount / Lastly, divide the rate and equal sign. Make sure its
Face amount expected positive first before add 1.
settlement
Short-term CASES:
(significant Present Value Amortized
financing) Cost SHORT TERM – IMMATERIAL (face value)
Long-term bears Face amount /
reasonable interest Face amount expected  Discounted the note – means the lender deducted
rates settlement the interest in advance.
Long-term bears no Amortized  Think, its simple interest, be mindful for the
interest Present Value Cost date
Long-term bears  Carrying amount = initial amount of NP – discount
unreasonable Present Value Amortized payable (since DP is contra-liability)
interest rate Cost  Short-term lump sum, increasing
(below market r)  Discount on NP – is a contra-liability account that is
deducted to determine the carrying amount
Cash price equivalent and subsequently measured  The standards do not require short-term notes to
at amortized cost be measured at face amount nor prohibit their
discounting
 Initially measured at PV or CPE the difference  Lump sum – increasing carrying amount of NP
between that amount and the face amount is  Interest expense = principal x rate x time
initially recognized as a discount (or premium in  Carrying amount = how much you incurred like
case of bonds payable) The beginning 880k then on dec. 880k + 60k= 940k

BEFORE THAT:
INSTALLMENT -IMMATERIAL (outstanding bal. of note)
CONCEPT OF TIME VALUE OF MONEY
- The total interest in here is allocated by the use
1. Future value of an amount (FV of 1)
of outstanding bal of note ratio multiplied to
FV of 1 = (1+i)n
the total amount of interest
*do the usual way but (x)
- Carrying amount : same rule provided above
2. Future value of the ordinary annuity  Installment – decreasing the carrying amount of NP
( ( 1+i )n−1)  Interest expense per installment = interest amount
x outstanding carrying amount/installment pay
i
Press 1.12 multiplication sign (2x) then equal sign for a  CA = Outstanding NP- remaining portion on interest
number of years (minus 1). Then minus 1 and equal.
Last, divide by the rate.
TIME VALUE APPLICATION
PV of 1 Lump sum
3. Future value of the annuity due PV of ordinary annuity Installments, first payment
is not made immediately
n+1 PV of annuity due Installments, first payment
( ( 1+i ) −1)
−1 is made immediately
i
Press 1.12 multiplication sign (2x) then equal sign for a
number of years. Then minus 1 and equal. Last, divide ELEMENT: RECEIVABLE
by the rate and minus 1. Initial Measure Subsequent
Face Amount Recoverable historical cost
4. Present value of an amount (PV of 1) (NRV)
PV of 1 = (1+i)-n Present Value Amortized Cost
*do the usual way (/)

LONG-TERM – REASONABLE INTEREST – SIMPLE

5. Present value of an ordinary annuity (face amount)
Here, interest is paid annually but the principal is at
maturity (n=2)
 Interest expense = (principal x rate x time)
 Accumulated expense = just add the interest
expenses
LONG TERM – REASONABLE INTEREST -COMPOUNDED
 Interest expense in 1st yr = (principal x rate x
time)
 Interest expense on following years =
(principal+ interest expense) x rate
 Accrued interest expense = interest expense of
that particular period.
Example:
1. On March 1, 20X4, Fine Co. borrowed ₱10,000 and
signed a two-year note bearing interest at 12% per
annum compounded annually. Interest is payable
in full at maturity on February 28, 20X6.
What amount should Fine report as a liability for
accrued interest on December 31, 20X5
 Accrued interest could mean the total amount of
interest expense that is not yet paid.
 Possibly initially measured at face amount since it is
a long-term bearing note.
Answer:
Interest expense 20x4 (10,000 x 12% x 10/12 ) 1,000
Interest expense 20x5 (10,000+1,000) x 12% ) 2,320
Interest payable/accrued interest 3,320
LONG TERM NON-INTEREST – LUMP SUM
(- amortization > new PV)
 In entry, remember to debit the discounted of
note payable
 When asked what is the carryig amount of the
note, the PV of that year.
 If asked, the initial measure of equipment. It is
by adding cash paid + present value
Example:
On January 1 , 20x1 ABC co. acquired equipment in
exchange of 100,000 cash and non interest note
payable of 1,000,000 due on Jnauary 1, 20x4. The
prevailing rate is 12%
PV = 1,000,000 x 0.7117802478 or PV of 1
Discount = 288,219.75
Equipment 711,780+100k
Discounted of N/P 288,219.75
Cash 100k
Note Payable 1M
 Interest expense = PV of the year x rate
 Carrying amount Y2 = PV + Interest expense
or press PV (711,780) and multiply to 1.12 =
797,194. And for the following year, multiply it
again to 1.12 and so on.
PS. Pinahirapan pa kami nito sa IA, ganito lang pala
gagawin *angry face
NON-INTEREST - INSTALLMENT
(-amortization of interest > new PV)
Present Value = Pv of ordinary x payment
Discount = Principal - PV
 Interest expense = PV x prevailing rate
 Interest expense 2 = (PV + interest expense) x rate
 Amortization= installment payment– interest
expense
 Present Value = PV + interest expense
Current portion – amortization
Non current portion – present value
NON-INTEREST – INSTALLMENT IN ADVANCE
PV = PV of annuity 1 x installment pay
Note : In the first installment, there is no interest
expense. That result to a carrying amount/PV of the
note is equal to PV – installment (see pg. 65)
2nd installment CA : Interest expnese – installment
(amortization) – prev. PV
INSTALLMENT DUE AT THE START OF EACH YEAR
(installment due every Jan 1)
Note: Similar procedure above and amortization table,
however different of getting the carrying amount:
1st installement (same) = no interest expense thus
carrying amount/PV of the note is equal to PV –
installment
2nd installment Dec 20x1 CA = PV on Jan 20x2 +
installment > 422, 513 + 250,000 = 672, 513
NON-INTEREST – SEMI ANNUAL INSTALLMENTS
Initial Measurement:
n = multily to 2 r= divide to 2
  Similar to note payables to pay a certain sum of money
Present Value = semi installment x PV of ordinary (ff. however it is usually used to connote bank loans and
the changes in n and r) similar types of financing
= 200k x PV of ordinary n=6 , 5%  Similar accounted with N/P, however it considers the
transaction costs
= 1,015,138
Initial Measurement:
Interest Expense = prevailing rate © x PV
Principal Amount
CA= Interest expense – payments (or amortization) – PV
Direct origination
(Origination Fee)
Carrying amount (also the amount received as cash)
NON-INTEREST, NON-UNIFORM INSTALLMENT

Note: Get each different installment PVs and get its sum In finding effective interest rate:
to arrive to the initial measurement
 Discount – carrying amount < face amount
Cash Flows PV of 1, n= 1-3 Present Value  Premium – carrying amount > face amount
 Trial and error approach:
600k 0.90909 545,454 Future cashflows x PV factor at x% = PV
400k 0.82645 330,580 (we find the right x)
200k 0.75131 150,262
1,026,296
INTEREST EXPENSE =
Interest Expense = prevailing rate x PV Interest payments + amortization
CA = Interest expense – payments (or amortization) – (interest payment refer to the interest given by bank, not the
PV effective rate)

NON-INTEREST, CASH EQUIVALENT NEW PV =

PV + Amortization
Discount/Premium = Cash price – note payable includes (PV is the carrying amount provided by initial measurement)
interest

Trial and Error Approach: missing prevailing rate Amount of loan amortization

Future cashflows x PV factor = PV of note Cost of bank loan

LONG TERM NOTE ISSUED SOLEY FOR CASH Secured loan

1. Proceeds equal to present value
2. Proceeds equal to the face amount (take note
on Day -1 difference)

NOTE WITH BELOW MARKET RATE

Initial Measurement:
Present Value= sum of (Principal x PV of 1) and
(Interest payable x PV of ordinary)

Interest Payable = nominal rate x face amount

Interest Expense = PV x prevailing rate
Note: usually interest expense is higher than interest
payable

LOAN PAYABLE