TYPE OF NOTES PV FORMULA DISCOUNT FORMULA

(1) short-term; non-

interest bearing; face PV=cash proceeds or face value none
value=cash proceeds

(2) short-term;
PV=face value none
interest bearing

(3) short-term; non-

interest bearing; face
value > cash PV = cash proceeds Face Value - Cash Proceeds
proceeds;

(4) short-term; non-

interest bearing; face
value > cash PV = cash proceeds Face value - cash proceeds
proceeds; payable on
installment

(5) long-term; interest

bearing; interest rate
is same as prevailing PV = face value
none
market rate

(6) long-term, non-

interest bearing; PV = cash proceeds Face value - Cash proceeds
issued for cash

(7) long-term; non-

interest bearing;
issued for non-cash PV = cash price Face value - Cash price
asset; cash price is
given

(8) long-term; non-

interest bearing;
issued for non-cash PV = Periodic payment x PVf of
Face Value - Present value
asset; no cash price annuity of P1
given; payable in
installments

(9) long-term; non-

interest bearing;
issued for non-cash PV = lumpsum payment x PVF of
Face value - Present value
asset; no cash price is P1
given; payable in
lumpsum
(10) long-term; non-
interest bearing;
issued for non-cash
asset; no cash price PV = periodic payment x PVF of
Face value - Present Value
given; payable in annuity due
installments with fist
payment given in
advance

(11) long-term;
interest bearing;
interest rate is
substantially lower PV = (face value x PVF of P1) +
than the prevailing (periodic interest payment x PVF Face value - Present Value
market rate; principal of annuity of P1)
is payable in
lumpsum; interest is
payable periodically

(12) long-term; non-

interest bearing; PV = total of the PV of each
issued for non-cash scheduled payment; PV of each
Face value - Present value
asset; no cash price scheduled payment = scheduled
given; periodic payment x PVF of P1
payment is unequal
DISCOUNT AMORTIZATION
INTEREST EXPENSE, END OF YEAR 1
METHOD

none none

none I=Pxrxt

Straight-line method I = Discount/term of note x time

I = (outstanding balance, Yr1/Total of

Outstanding balance method
Outstanding Balances) x Discount

none I=Pxrxt

effective interest method I = Pv x eir x t

effective interest method I = Pv x eir x t

effective interest method I = Pv x eir x t

effective interest method I = Pv x eir x t

effective interest method I = PV(net of first payment) x eir x t

effective interest method I = Pv x eir x t

effective interest method I = Pv x eir x t

On September 1, 20x6, the company purchased an equipment by paying P1,000,000 cash and issuing
a P5,000,000, 8%, promissory note, P1,000,000 of which matures annually starting September 1, 20x7.
The equipment can be purchased on a cash basis for P5,534,968.

The prevailing market rate of interest for this type of note is 12%.
20x6
9/1/20x6 Equipment 5,534,968
Discount on Notes Payable 465,032
Cash 1,000,000
Notes Payable 5,000,000

Amortization Table Amortization of Discount on NP increases the Carrying Amount (PV

Date Interest Interest Amortization Principal PV
Expense Paid Payment
9/1/20x6 4,534,968
9/1/20x6 9/1/20x7 544,196 400,000 144,196 1,000,000 3,679,164
9/1/20x7 9/1/20x8 441,500 320,000 121,500 1,000,000 2,800,664
9/1/20x8 9/1/20x9 336,080 240,000 96,080 1,000,000 1,896,744
9/1/20x9 9/1/20x0 227,609 160,000 67,609 1,000,000 964,353
9/1/20x0 9/1/20x1 115,647 80,000 35,647 1,000,000 0

Dec 31 Interest Expense 133,333

Interest Payable 133,333

Interest Expense 48,065

Discount on Notes Payable 48,065

How would you present your notes payable on the statement of financial position
as at December 31, 20x6?
Current Liabilities
Currently Maturing Portion of 8% Notes Payable 1,000,000
Less: Unamortized Discount 96,131
903,869
NonCurrent Liabilities
8% Notes Payable 4,000,000
Less: Unamortized Discount 320,836
3,679,164

Obtained a loan from the bank by issuing a non-interest bearing note for P3,000,000 which will be
paid in total after 4 years. The cash proceeds from this issuance amounts to P2,500,000.
9/1/20x6 Cash 2,500,000
Discount on Notes Payable 500,000
Notes Payable 3,000,000

using effective interest rate in amortizing discount:

what is your effective interest rate?
amortization table
Date Amortization Discount PV Dec 31, 20x6 Interest Expense
9/1/20x6 500,000.00 2,500,000.00 Interest Payable
9/1/20x7 116,500.00 383,500.00 2,616,500.00 (116,500 x 4/12)
9/1/20x8 121,928.90 261,571.10 2,738,428.90
9/1/20x9 127,610.79 133,960.31 2,866,039.69
9/1/20x0 133,960.31 - 3,000,000.00 3,000,000 Notes Payable
133,557.45 402.86 Cash
effective interest rate is at 4.66% 133,960

On September 1, 20x6, the company acquired an equipment by issuing a non-interest bearing, P5million
notes payable which will be paid at the rate of P1,000,000 per year starting September 1, 20x8.
The prevailing market rate of interest for this type of note is 12%.

What is the present value of the note?

date payment pvf PV

9/1/20x6
9/1/20x7 0.8929 -
9/1/20x8 1,000,000 0.7972 797,200.00
9/1/20x9 1,000,000 0.7118 711,800.00
9/1/20x0 1,000,000 0.6355 635,500.00
9/1/20x1 1,000,000 0.5674 567,400.00
9/1/2022 1,000,000 0.5066 506,600.00
5,000,000.00 3,218,500.00 1,781,500

9/1/20x6 Equipment 3,218,500.00 Dec 31 20x6 Interest Expense

Discount on N/P 1,781,500.00 Discount on Notes Payable
Notes Payable 5,000,000.00

Date Interest Expens Discount Bal Principal PV

9/1/20x6 1,781,500.00 3,218,500.00
9/1/20x7 386,220.00 1,395,280.00 3,604,720.00
9/1/20x8 432,566.40 962,713.60 1,000,000 3,037,286.40
9/1/20x9 364,474.37 598,239.23 1,000,000 2,401,760.77
9/1/20x0 288,211.29 310,027.94 1,000,000 1,689,972.06
9/1/20x1 202,796.65 107,231.29 1,000,000 892,768.71
9/1/2022 107,231.29 - 1,000,000 -
 4,534,968
465,032

creases the Carrying Amount (PV) of NP.

4,583,033 = Face Value 5,000,000 Discount on NP upon purchase

Unamortized 416,967 Amortization - 12/31/20x6
4,583,033.39 Unamortized Discount

Discount?
EIR?
nterest Expense 38,833.33
Interest Payable 38,833.33
116,500 x 4/12)

Notes Payable 3,000,000

3,000,000

nterest Expense 128,740.00

Discount on Notes Payable 128,740.00
on NP upon purchase 465,032
on - 12/31/20x6 48,065
ed Discount 416,967
 interest 12%
9/1/2016 Balance 8% total payment pvf of 1 PV
9/1/2016 9/1/2017 5,000,000 400,000.00 1,400,000 0.8929 1,250,060.00
9/1/2017 9/1/2018 4,000,000 320,000.00 1,320,000 0.7972 1,052,304.00
9/1/2018 9/1/2019 3,000,000 240,000.00 1,240,000 0.7118 882,632.00
9/1/2019 9/1/2020 2,000,000 160,000.00 1,160,000 0.6355 737,180.00
9/1/2020 9/1/2021 1,000,000 80,000.00 1,080,000 0.5674 612,792.00
unequal 4,534,968.00
1,000,000
Cash Price 5,534,968.00

interest 8%
9/1/2016 8% total payment pvf of 1 PV
9/1/2016 9/1/2017 5,000,000 400,000.00 1,400,000 0.9259 1,296,260.00
9/1/2017 9/1/2018 4,000,000 320,000.00 1,320,000 0.8573 1,131,636.00
9/1/2018 9/1/2019 3,000,000 240,000.00 1,240,000 0.7938 984,312.00
9/1/2019 9/1/2020 2,000,000 160,000.00 1,160,000 0.735 852,600.00
9/1/2020 9/1/2021 1,000,000 80,000.00 1,080,000 0.6806 735,048.00
4,999,856.00
1,000,000
PV 5,999,856.00
Cash Price 6,000,000
144.00