(Intermediate Accounting 2)

LECTURE AID

2021

ZEUS VERNON B. MILLAN

Chapter 2 Notes Payable

Learning Competencies

• State the initial and subsequent

measurement of notes and loans payable.
• Apply present value factors properly.
• Prepare amortization tables.
• Explain the accounting for origination fees
on loans payable.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Notes payable

• Notes payable are obligations supported by

debtor promissory notes.
• The accounting for notes payable is similar to the
accounting for notes receivable.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Initial measurement of financial liabilities

• Financial liabilities are initially recognized at fair value minus

transaction costs that are directly attributable to the issuance,
except for financial liabilities at FVPL whose transaction costs are
expensed immediately.
• Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date.
• Transaction costs are incremental costs that are directly
attributable to the issue of a financial liability. An incremental cost
is one that would not have been incurred if the entity had not issued
the financial instrument.
INTERMEDIATE ACCTG 2 (by:
MILLAN)
• Short-term notes payable are initially measured either at
face amount or present value.
• Long-term notes payable with reasonable interest rate are
initially recognized at face amount.
• Long-term noninterest-bearing notes payable and Long-
term notes payable with unreasonable interest rate are
initially measured at present value.
• If the cash price equivalent of the noncash
consideration received in exchange for the note is available,
the note payable is initially measured at this amount.
INTERMEDIATE ACCTG 2 (by:
MILLAN)
Stated interest rate vs. Effective interest rate

• Stated interest rate (nominal rate, coupon rate, or face

rate) is the rate appearing on the face of an interest-
bearing note.
• Effective interest rate (imputed rate of interest, current
market rate or yield rate) is the rate used in present
value computations.

INTERMEDIATE ACCTG 2 (by:

MILLAN)
Loan payable

• Origination fees are deducted from the carrying amount of

the loan and subsequently amortized using the effective
interest method.
• Origination fees are included in the calculation of the
effective interest rate over the expected term of the loan
payable, meaning, on transaction date, the origination fees
are treated as adjustment to the effective interest
rate.
INTERMEDIATE ACCTG 2 (by:
MILLAN)
 END
INTERMEDIATE ACCTG 2 (by: MILLAN)