NOTES PAYABLE ILLUSTRATIVE PROBLEMS

PROMISSORY NOTE Note issued solely for cash

o An unconditional promise in writing made by o when a note payable is issued solely for cash,
one person to another, signed by the maker, the present value is equal to the cash proceeds
engaging to pay on demand or at a fixed or
determinable future time, a sum certain in On November 1, 2022, an entity discounted its own note
money to order or to bearer. of P1,000,000 at 12% for one year.
Note payable P1,000,000
 Cash Less: Discount (12% x P1,000,000) P 120,000
 Property Net proceeds P 880,000
i. Interest-bearing note
ii. Non-interest bearing note The discount on note payable of P120,000 is the total
interest expense for one year.
Cash 880,000
NATURAL PERSON (individual)
Discount on notes payable 120,000
PERSON Notes payable 1,000,000

JURIDICAL PERSON (corp/business) Thus, on December 31, 2022, the discount on note
payable will be amortized as interest expense (P120,000
Example: x 2/12 = P20,000)
Interest Expense 20,000
Virac, Catanduanes
Discount on notes payable 20,000
P50,000.00
(120,000 x 2/12)
September 16,
2023 o If a statement of financial position is prepared
PROMISSORY NOTE on year-end, the note payable is classified and
For value received, I promise to pay Michelle M. reported as current liability. And its amortized
Candelaria the amount of Php fifty thousand pesos cost will be P900,000 (P1,000,000 –
only (Php 50,000.00) on December 17, 2023 plus P100,000)
interest at the annual rate of 12 percent.
INTEREST BEARING NOTE ISSUED FOR PROPERTY
(SGD) Jimylen G. Surban  When a property or noncash asset is acquired
INITIAL MEASUREMENT OF NOTES PAYABLE by issuing a promissory note which is interest
bearing, the property is recorded at purchase
PFRS 9, provides that a note payable not designated at
price
FVPL shall be measured initially at fair value (present
 The purchase price is reasonably assumed to be
value of the future cash payments using market rate of
interest) minus transaction costs that are directly the present value of the note and fair value of
the property
attributable to the issue of the note payable
If the note payable is irrevocably designated at FVPL, the On January 1, 2022, an entity acquired an equipment
transaction cost is expensed immediately. for P1,000,000 payable in 5 annual equal installments
every December 31 of each year. Interest is 10% on the
unpaid balance
SUBSEQUENT MEASUREMENT OF NOTES PAYABLE
JOURNAL ENTRIES
After initial recognition, note payable shall be 2022
subsequently measured at either: Jan 1, Equipment 1,000,000.00
Notes payable
a. At amortized cost using the effective interest
1,000,000.00
method
o this is the amount at which the note payable is
measured initially: Dec. 31 Interest Expense 100,000.00
1. minus principal payment Notes payable 200,000.00
2. plus premium amortization or minus Cash 300,000.00
discount amortization Payment for the first installment and
interest for 2022
b. At fair value through profit or loss if the note
payable is designated irrevocably as
measured at FVPL
Computation:  Observe that there is no agreed interest and no
10% x 1,000,000 = 100,000.00 cash price is available for the equipment.
1,000,000 / 5 = 200,000
10% x 800,000 = 80,000.00  The cost of the equipment is equal to the present
value of the P200,000 annual installments in 5
2023 years at an appropriate rate of 10% (assumed
Dec. 31 Interest Expense 80,000.00 prevailing market rate of interest).
Notes payable 200,000.00
Cash 280,000.00 The present value of an ordinary annuity of 1 for 5 years
Payment for the second installment and at 10% is 3.7908.
interest for 2022
JOURNAL ENTRIES
NONINTEREST BEARING NOTE ISSUED FOR 2022
PROPERTY (interest is not state, thus, will compute Jan 1. Equipment 758,160.00
the annuity) Discount on Notes payable 241,840.00
o when a noninterest bearing note is issued for Notes Payable
property, the property is recorded at the cash 1,000,000.00
price (original price) of the property, which is
also assumed to be the present value of the note Dec. 31 Notes Payable 200,000.00
issued Cash 200,000.00
o the difference between the cash price and face Payment of first installment for 2022.
of the note is the imputed interest
31 Interest Expense 75,816.00
On January 1, 2022, an entity acquired an equipment Discount on Notes payable 75,816.00
with a cash price of P350,000 for P500,000 (installment Amortization of the discount on notes
price/face amount), P100,000 down and the balance payable for 2022.
payable in 4 equal annual installments.

JOURNAL ENTRIES Amortization Table

2022 Date Payment Interest Princip Present
Jan 1, Equipment 350,000.00 a b al Value
Discount on Notes payable 150,000.00 C d
Cash 100,000.00 Five (d x (a-c) (d-c)
Notes Payable 400,000.00 installme 10%)
nt
Dec. 31 Notes Payable 100,000.00 1/1/22 758,160
12/31/ 200,000 75,816 124,18 633,976
Cash 100,000.00
22 4
Payment of first installment for 2022. 12/31/ 200,000 63,398 136,60 497,374
23 2 (CL)
31 Interest Expense 60,000.00 12/31/ 200,000 49,737 150,26 347,111
Discount on Notes payable 60,000.00 24 3
Amortization of the discount for 2022. 12/31/ 200,000 34,711 165,28 181,822
25 9
Amortization Table 12/31/ 200,000 18,178 181,82 _
Year Notes Payable Fraction Amortization 26 2
2022 P400,000.00 4/10 P60,000.00 1,000,00 241,84 758,16
2023 300,000.00 3/10 45,000.00 0 0 0
2024 200,000.00 2/10 30,000.00
2025 100,000.00 1/10 15,000.000 On December 31, 2022, the current portion of the note
P1,000,000.00 P150,000.00 payable would be reported as current liability.
(200,000 less 63,398= 136,602)
NONINTEREST BEARING NOTE ISSUED FOR
PROPERTY with no cash price The noncurrent portion of the note payable would be
reported as noncurrent liability.
On January 1, 2022, an entity acquired an equipment 600,000 (Dec. 2024-2026)
for P1,000,000 payable in 5 equal annual installments – 102,626 (Dec. 2024-2026)
on every December 31 of each year. 497,374
 Under the fair value option, the transaction cost is
Noninterest bearing note payable lump sum recognized as outright expense.
On January 1, 2022, an entity acquired an equipment There is no amortization of discount and premium on note
for P1,000,000. The entity paid P100,000 down and payable. Interest expense is recognized using the
signed a noninterest bearing note payable for the nominal or stated rate.
balance which is due after 3 years on January 1, 2025.
There was no established cash price for the Illustration:
equipment. The prevailing interest rate for this type of On January 1, 2020, an entity borrowed from a bank
note is 10%. The present value of 1 for 3 periods is P4,000,000 on a 12% 5-year interest bearing note. The
0.7513. entity received P4,000,000 which is the fair value of the
note on January 1, 2020. Transaction cost of P100,000
Downpayment P100,000 was paid by the entity. The fair value of the note
Present value (P900,000x.7513) payable was P3,500,000 on December 31, 2020. The
676,170 entity has elected irrevocably the fair value option for
Cost of equipment P776,170 measuring the note payable. The change in fair value
comprised P50,000 attributable to credit risk and
Face value P900,000 P450,000 attributable to interest risk.
Present value of the note
(676,170)
Imputed interest JOURNAL ENTRIES
P223,830 Jan 1 Cash 4,000,000
Notes Payable 4,000,000
JOURNAL ENTRIES
2022 Transaction Cost 100,000
Jan 1, Equipment 776,170 Cash 100,000
Discount on Notes payable 220,830
Cash 100,000 Dec. 31 Interest Expense (12%x4M) 480,000
Notes Payable 900,000 Cash 480,000

31 Interest Expense 67,617 Notes payable 500,000

(676,170*10%) Gain from change in fair value
Discount on Notes payable 67,617 450,000
Amortization of the discount on note for Gain from credit risk – OCI x 50,000
2022.
2024 Carrying amount P4,000,000
Jan 1 Notes payable 900,000 Fair value – Dec 31 P3,500,000
Cash 900,000 Decrease in fair value P 500,000
Full payment of the note.

Amortization Table
Date Interest Discount Present
Expense on Note value
payable
1/1/22 223,830 676,170
12/31/22 67,671 156,213 743,787
12/31/23 74,379 81,834 818,166
12/31/24 81,834 0.00 900,000

Fair value option of measuring note payable

PFRS 9 provides that the gain or loss on financial liability
designated at fair value through profit or loss shall be
accounted for as follows:
a. The change in fair value attributable to the
credit risk is recognized in other comprehensive
income.
b. The remaining amount of the change in fair
value is recognized in profit or loss
 INITIAL RECOGNITION PRINCIPLE
BONDS PAYABLE Bonds are recognized in the financial statements when,
and only when, the entity becomes a party to the
BONDS contractual provisions of the instrument.
o A certificate of indebtedness whereby the
borrower agrees to pay a specified sum of INITIAL MEASUREMENT OF BONDS PAYABLE
money at a specified future date and to make Fair value less transaction cost
periodic interest payments at a stated rate until The fair value of a bond is determined thru (in the order
the principal sum is paid. of priority)
o A contract of debt whereby the issuer/debtor 1. Active market quotation;
borrows funds from another party called the 2. Present Value of all principal and interest
investor/creditor. payments
o The investor/creditor is also called the
bondholder. Transaction Costs
Incremental costs that are directly attributable to the
Usually issued in denominations of P1,000, P5,000, or acquisition, issuance, or disposal of the bonds. a.ka. Bond
P10,000 issue costs
 Legal fees
Face value of the bonds  Printing and engraving of bond certificates
 Other similar charges
BOND INDENTURE NOTE: Transaction costs decrease the carrying value of
The contract between the issuer and the bondholder: the bonds.
 Terms and arrangements of the bond contract.
 Rights and duties of the parties. JOURNAL ENTRIES
 Other pertinent details of the contract of debt Bonds Issued at a Bonds Issued at a
Discount Premium
TYPES OF BONDS Stated rate < effective Stated rate > effective
TERM BONDS rate rate
- mature on a single date, a.k.a lumpsum bonds Face amount > present Face amount < present
SERIAL BONDS value value
- mature in installments, a.k.a installment bonds
SECURED BONDS
Issuance of Bonds
- - real estate mortgage bonds, chattel mortgage
Bonds Issued at a Discount
bonds, collateral trust bonds
DEBENTURE BONDS Cash xxx
Discount in bonds payable xxx
- unsecured bonds (bonds without any collateral
Bonds payable xxx
security)
CONVERTIBLE BONDS
- - can be converted into shares of the issuing Bonds Issued at a Premium
entity Cash xxx
CALLABLE BONDS Bonds payable xxx
- - Bonds that give the issuing entity the right to Premium on bonds payable xxx
call, redeem, or retire the bonds prior to their
maturity date Payment of Bond Transaction (or issue) costs
Bonds Issued at a Discount
SAMPLE: Discount on bonds payable xxx
Cash xxx

Bonds Issued at a Premium

Premium on bonds payable xxx
Cash xxx

Illustration 1
Initial Measurement of Bonds
On January 1, 2022, VC Company issued 5-year,
P10,000,000, 15% bonds. Interests on the bonds are
payable semiannually on June 30 and December 31 of
each year until maturity.
Determine the initial measurement of the bonds under Discount on note payable 10,000
each of the following independent cases: Cash 10,000
1. The bonds were issued at 98. Or
COMPOUND JOURNAL ENTRIES
JOURNAL ENTRIES Cash (10M x .98) 9,790,000
Cash (10M x .98) 9,800,000 Discount on note payable 210,000
Discount on note payable 200,000 Cash 10,000,000
Cash 10,000,000
Note: 98 is known as the bond quoted price. The quoted 2. The bonds were issued at 109.
price is a percentage that is multiplied to the face
amount of the bonds to get the fair value. JOURNAL ENTRIES
Cash (10M x 1.09) 10,900,000
Bonds payable 10,000,000
2. The bonds were issued at 109. Premium on bonds payable 900,000

JOURNAL ENTRIES
Premium on bonds payable 10,000
Cash (10M x 1.09) 10,900,000 Cash 10,000
Bonds payable 10,000,000
Premium on bonds payable 900,000
Or
COMPOUND JOURNAL ENTRIES
Cash (10M x 1.09) 10,890,000
3. The bonds were issued to yield 1
Bonds payable 10,000,000
Premium on bonds payable 890,000
Present value of the face amount
Face amount x PV of 1 at 6% for 5,584,000
10 period (10M x 0.5584 Accrued Interest on the Bond Issued
Add: Present value of the interest 5,520,075 The accrued interest must be excluded when determining
payments the initial measurement of the bonds.
Semi-annual interest x PVOA of 1
at 6% for 10 periods (10M x Illustration 3
7.5%) x 7.3601 Accrued Interest on Bonds Issued
Bonds payable, 1/1/2022 11,104,075 On March 1, 2022, Sensei Co. issued 1,000 of its
P1,000 face value, 12% bonds at 106 plus accrued
interest. These bonds pay interest semi-annually on June
JOURNAL ENTRIES 30 and December 31.
Cash (10M x 1.09) 11,104,075
Bonds payable 10,000,000 1. At what amount shall the bonds be initially
Premium on bonds payable 1,104,075 measured on March 1, 2022?
Face value of the bonds (1,000 1,000,000.00
x 1,000)
Illustration 2 X ___1.06____
Initial Measurement of Bonds with Bond Issue Costs Initial Measurement of Bonds 1,060,000.00
On January 1, 2022, VC Company issued 5-year, Payable
P10,000,000, 15% bonds. VC Company incurred bond
issue costs of P10,000. Interests on the bonds are 2. What total amount of cash was received by
payable semi-annually on June 30 and December 31 of Sensei Co. on March 1, 2022, upon issuance
each year until maturity. of the bonds?
Market value of the bonds 1,060,000.00
Prepare the journal entry to record the issuance of bonds Add: Accrued interest 20,000
(Dec. 31, 2021-March 1,
and payment of bond issue cost under each of the
2022)(1M x 12% x 2/12)
following independent cases:
1. The bonds were issued at 98. Total amount of Cash Received 1,080,000.00

JOURNAL ENTRIES
Cash (10M x .98) 9,800,000
Discount on note payable 200,000
Cash 10,000,000
 3. Journalize the issuance of the bonds on FinancialStatementPresentation
March 1, 2022. Bonds are usually presented under noncurrent liabilities
because these are long-term in nature.
JOURNAL ENTRIES
Cash 1,080,000 Bonds payable
Bonds payable 1,000,000 xxx
Premium on bonds payable 60,000 Less: Unamortized discount on bonds payable
Interest payable 20,000 (xxx)
Add: Unamortized premium on bonds payable
4. Provide the journal entry to record the xxx
payment of interest on June 30, 2022. Amount to be presented as bonds payable
xxx
JOURNAL ENTRIES
Interest expense (1M x 12% x 4/12) 40,000
Interest payable 20,000
Cash 60,000

Subsequent Measurement of Bonds Payable

At amortized cost using the effective interest method.
Outstanding face amount xxx
Add (Deduct):
Unamortized Premium xxx (xxx)
(Discount) Amortized cost ___xxx__

RETIREMENT OF BONDS
Bonds may be retired at maturity date or prior to the
maturity date.

Retirement at maturity date

o Any discount or premium on bonds payable is
completely amortized
o The amount of cash paid to retire the bonds is
simply equal to the bond’s face value
o No gain or loss on bond retirement is recognized

JOURNAL ENTRIES
Bonds payable xxx
Cash xxx

Retirement prior to the maturity date

 Procedure
1) Determine the carrying amount of the bonds on
the retirement date by updating the
amortization of the premium or discount to the
date of retirement.
2) Any accrued interest on the bonds to the
retirement date must be determined.
3) Recognize gain or loss on retirement date.
4) Retirement price > carrying amount of the
bonds on retirement date = loss on bond
retirement
5) Retirement price < carrying amount of the
bonds on retirement date = gain on bond
retirement