Module 8: Note Payable

THEORIES

1. An entry issued a note solely in exchange for cash. Assuming that the items listed below differ in
amount the present value of the note at issuance is equal to
a. Face amount
b. Face amount discounted at the prevailing interest rate
c. Proceeds received
d. Proceeds received discounted at the prevailing interest rate

2. If the present value of a note issued in exchange for a property is less than its face amount, the
difference should be
a. Included in the cost of the asset
b. Amortized as interest expense over the life of the note
c. Amortized as interest expense over the life of the asset
d. Included in interest expense in the year of issuance

3. An entity borrowed cash from a bank and issued to the bank a short-term non interest bearing note
payable. The bank discounted the note at 10% and remitted the proceeds to the entity. The
effective interest rate paid by the entity in this transaction would be
a. Equal to the stated discount rate of 10%
b. More than the stated discount rate of 10%
c. Less than the stated discount rate of 10%
d. Independent of the stated discount rate of 10%

4. At issuance date, the present value of a promissory note is equal to the face amount if the note
a. Bears a stated rate of interest which is realistic.
b. Bears a stated rate of interest which is less than the prevailing market rate for similar notes.
c. Is noninterest bearing and the implicit interest rate is less than the prevailing market rate for
similar notes.
d. Is noninterest bearing and the implicit interest rate is equal to the prevailing market rate for similar
notes.

5. An entry shall measure initially a note payable not designated at fair value through profit or loss at
a. Face amount
b. Fair value
c. Fair value plus transaction cost
d. Fair value minus transaction cost

6. After initial recognition, an entry shall measure a note payable at

a. Amortized cost
b. Fair value through profit or loss
c. Either amortized cost or fair value through profit or loss
d. Either amortized cost or fair value through other comprehensive income

7. Under the fair value option, an entity shall measure the note payable initially at
a. Face amount
 b. Fair value plus transaction cost
c. Fair value minus transaction cost
d. Fair value

8. Which the following statements is true in relation to the fair value option of measuring note
payable?
a. At initial recognition, an entity may irrevocably designate the note payable as at fair value through
profit or loss.
b. The interest expense on the note payable is recognized using the stated interest rate.
c. After initial recognition, the note payable is remeasured at fair value at every year-end with
changes in fair value generally recognized in profit or loss.
d. All of these statements are true.

9. Which statement concerning discount on note payable is Incorrect?

a. Discount on Note payable may be debited when entity discounts its own note with the bank
b. The discount on note payable is a deduction from face amount note payable.
c. The discount on note payable represents interest charges applicable to future periods.
d. Amortizing the discount on note payable gradually decreases the carrying amount of liability over
the life of the note.

10. When a note payable with no ready markets is exchanged for property whose fair value is currently
indeterminable
a. The present value of note payable must be approximately using an imputed interest rate
b. The note payable should not be recorded until the fair value of the property becomes evident.
c. The entity receiving the property should estimate the value for the property
d. Both entities involved in the transaction should negotiate a value to be assigned to the property.

11. When a note payable is issued for property, the present value of note is measured by
a. The fair value of the property
b. The fair value of the note payable
c. Using an imputed interest rate to discount all future payments on the note payable
d. All of these are considered in measuring the present value of the note payable

12. The note payable is exchanged for property, the stated interest rate is presumed to be fair when
a. No interest rate is stated
b. The stated interest rate is unreasonable
c. The face amount of note is material different from the cash sale price for similar property
d. The stated interest rate is equal to the market rate

13. The discount resulting from the determination of the present value of the nite payable should be
reported as
a. Deferred credit
b. Direct deduction from the face amount of note
c. Deferred charge
d. Addition to the face amount of note

14. Which statement is correct when an entity issued a note payable with no stated interest rate in
exchange for a depreciable asset?
a. The asset should be depreciated over the term of the note payable
 b. If fair value is unavailable, the note payable should be recorded at present value discounted at
the market rate of interest
c. Both the note and the asset are recorded at face amount of note payable
d. The note payable is recorded at face amount even if the fair value of asset is readily available.
15. An entity shall measure initially a note payable not designated at fair value through profit or
loss at
a. face amount
b. fair value
c. fair value plus transaction cost
d. fair value minus transaction cost

PROBLEM SOLVING

1. On January 1, 2022, Box Company Borrowed P5,000,000 on a 10% 5-year interest bearing note.
The net proceeds from the borrowing amounted to 2,550,000. Interest is payable annually every
December 31.

The entity elected the fair value option. On December 31, 2022, the bonds were quoted at 95.
What amount should be reported as gain or loss from change in fair value for 2022?

a. 2,450,000 gain
b. 2,450,000 loss
c. 2,550,000 gain
d. 2,550,000 loss

Note Payable 5,000,000

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

2. Balloon Company frequently borrowed from the bank in order to maintain sufficient operating cash. The
loans were at a 12% interest rate, with interest payable at maturity.

The entity recorded interest expenses when the loans were repaid. As a result, interest expense of
85,000 was recorded in 2023. The entity repaid each loan on the scheduled maturity date.

Date Amount Maturity Term

11/01/2022 400,000 10/31/2023 1 year
02/01/2023 1,000,000 07/31/2023 6 months
05/01/2023 700,000 01/31/2024 9 months

If no correction is made, by what amount would interest expenses for 2023 be understated?

a. 56,000
b. 92,000
c. 85,000
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. Mirror Company bought a new machine and agreed to pay an equal annual installment of 700,000 at
the end of each of the next five years. The prevailing interest rate for this type of transaction is 12%.

The present value of an ordinary annuity of 1 at 12% for five periods is 3.60. The future amount of an
ordinary annuity of 1 at 12% for five periods is 6.35. The present value of 1 at 12% for five periods is
0.567. What amount should be reported as note payable if financial statements were prepared today?

a. 4,445,000
b. 2,520,000
c. 396,900
d. 4,000,000

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

4. Using the problem above, What amount should be reported as interest expense for the first year?

a. 167,000
b. 396,900
c. 302,400
d. 457,200

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

5. On September 1, 2022, Flower Company issued a note payable in the amount of 1,800,000, bearing
interest at 12%, and payable in three equal annual principal payments of P600,000. On this date, the
prime rate was 11%.

The first interest and principal payment was made on September 1, 2023. On December 31, 2023, What
amount should be reported as accrued interest payable?

a. 44,000
b. 48,000
c. 66,000
d. 72,000

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. On January 1, 2023, Mariano Company borrowed 3,000,000 on a 10% five-year interest bearing note.
On December 31, 2023, the fair value of the note was determined to be P2,500,000.
The entity irrevocably elected the fair value option in measuring the note payable. What amount should
be reported as interest expense for 2023?

a. 300,000
b. 150,000
c. 200,000
d. 190,500
Interest Expense (3,000,000 x 10%) 300,000

7. Using Problem number 6, What is the carrying amount of the note payable on December 31, 2023?

a. 3,000,000
b. 2,000,000
c. 1,900,000
d. 2,500,000

Carrying amount of Note Payable 2,500,000

8. Using Problem number 6, What amount should be reported as gain or l;oss from change in fair value of
the note payable for 2023?

a. 500,000 gain
b. 500,000 loss
c. 450,000 gain
d. 450,000 loss

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

9. On September 30, 2024, Money Company borrowed 900,000 on a 9% note payable. The entity paid
the first of four quarterly payments of 195,300 when due on December 21, 2024. What amount should be
reported as interest expense for 2024?

a. 23,250
b. 19,500
c. 20,250
d. 25,000

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

10. Based on problem number 9, On December 31, 2024, what is the carrying amount of the Note
Payable?

a. 704,700
b. 740,500
c. 785,900
d. 825,700

Note Payable 900,000

Payment 195,300
Carrying Amount 704,700

11. On January 1, 2023, Frame Company sold land to Picture Company. There was no established
market price for the land.

Picture Company gave Frame Company a 2,400,000 non-interest bearing note payable in three equal
annual installments of 800,000 with the first payment due December 31, 2023.

The note had no ready market. The prevailing rate of interest for a note of this type is 10%.

The present value of a 2,400,000 note payable in three equal annual installments of P800,000 at a 10%
rate of interest is 1,992,000

a. 1,325,900
b. 2,400,000
c. 1,600,000
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. On January 1, 2023, Aica Company reported a note payable of P2,000,000. The note payable is
dated October 1, 2022, bears interest at 15%, and is payable in three equal annual payments of
P500,000. The first interest and principal payment was made on October 1, 2023. What amount should
be reported as interest expense for 2023?

a. 135,000
b. 30,000
c. 800,000
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. On March 1, 2022, Tissue Company borrowed P5,000,000 and signed a 2 year note payable bearing
interest at 12% per annum compounded annually. Interest is payable in full at maturity on February 28,
2024.
What amount should be reported as accrued interest payable on December 31, 2023?

a. 1,160,000
b. 5,000,000
c. 600,000
d. 2,160,000

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. At the beginning of the current year, Book Company borrowed P4,000,000 from a major evidenced by
a non-interest bearing note payable due in three years. The entity agreed to supply the customer’s
inventory needs for the loan period at an amount lower than market value. At the 12% imputed interest
rate for this type of loan, the present value of the note is P3,450,000 at the date of issuance. What
amount of interest expense should be reported for the current year?

a. 3,450,000
b. 414,000
c. 4,000,000
d. 480,000
Interest Expense (12% x 3,450,000) 414,000
14. On December 31, 2023, Coffee Company purchased a machine from Vase Company in exchange for
a non-interest bearing note payable requiring eight payments of 100,000.

The first payment was made on December 31, 2023 and the others are due annually on December 31.

At date of issuance, the prevailing rate of interest for this type of note was 11%

PV of an ordinary annuity of at 11% for 8 periods 5.146

PV of an annuity of 1 in advance at 11% for 8 periods 5.712

On December 31, 2023, what is the carrying amount of the note payable?

a. 571,200
b. 100,000
c. 471,200
d. 514,600

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

Payment, 12/2023 (100,000)
Balance 12/2023 471,200
15. Wallet Company reported a 10% note payable of P2,400,000 on June 30, 2023. The note is dated
October 1, 2021 and payable in three equal annual payments of P 800,000 plus interest.

The first interest and principal payment was made on October 1, 2022.

What amount should be reported as accrued interest payable for this note, on June 30,2023?

a. 270,000
b. 1,600,000
c. 800,000
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