NOTES PAYABLE
Notes Payable is a liability that arises from a promissory note. There are two perspectives:
Payee Notes receivable
Maker Notes payable
Maker – the one who creates and signs the promissory note in which it obliges itself to pay a
specified sum of money at a specified date in the future.
Payer – the one entitled to receive the specified amount of money at a future specified in the
promissory note.
For this module, the perspective is of the maker.
I. Initial Measurement
➢ Initially measured at fair value less transaction costs incurred.
➢ The matter of measurement depends on the classification of notes payable. It is
summarized below:
Initial Measurement
Short-term Face amount
Stated rate Face amount
Notes
=
Payable Effective rate
Interest-
bearing Stated rate
≠ Present value
Long-term
Effective rate
Noninterest Present value
bearing
➢ For present value computations, the manner of payment shall be considered.
Manner of Payment Present value computation
Lump-sum Present value factor of 1 (Single Payment)
• At the end of each period:
- PV Factor of Ordinary Annuity
Installment
• At the beginning of each period:
- PV Factor of Annuity Due
Problem 1: A company issued the following notes payable during the year 2023, all for the
purchase of merchandise inventory:
Note Number Face amount Stated rate Market rate Maturity
1 P2,000,000 10% 10% 4 years
2 5,000,000 None 6% 4 years
3 4,000,000 None 7% 2 years
4 3,000,000 5% 8% 3 years
Principal amounts of Notes 1, 2, and 4 are all payable on the relevant maturity dates while Note
3 is payable in two equal installments. Determine the initial fair value of each note and entries
to record them on initial recognition.
II. Subsequent Measurement
Interest-bearing: Interest-bearing:
Stated Rate = Market Stated rate ≠ Market Non-interest bearing
rate Rate
Carrying amount Based on remaining Present value amounts in the amortization
each reporting date face amount table
Interest expense Face amount x Carrying value (amortization table) x
Stated rate Effective interest rate
Recognition of
accrued interest Based on stated rate N/A (no stated rate)
payable
Problem 2: On January 1, 2023, Graduate Company acquired a building for a total price of
P15,000,000. Consider the following independent cases:
Case 1: The company issued an 8% interest-bearing promissory note for the said acquisition. The
market rate averaged 8% on the same date and the term of the note is for 3 years. (Interest
bearing: Stated rate = Market rate; Lump Sum)
a. Record the issuance of the note.
b. Determine the interest expense to be recorded per year.
Case 2: The market rate averaged 10% on the same date. The company paid P5,000,000 down
payment and issued an 10% interest-bearing promissory note for the remaining balance. This
note is payable in equal installments of P2,500,000 starting from December 31, 2023, until
December 31, 2026. (Interest bearing: Stated rate = Market rate; Installment)
a. Record the issuance of the note.
b. Determine the interest expense per year and the carrying amount of the note per year.
Case 3: The company issued an 8% interest-bearing promissory note with face amount equal to
the entire value of the building. The principal is payable on December 31, 2026, while the interest
is payable every December 31 of each year. On the same date, market rates averaged 10%.
(Interest bearing: Stated rate ≠ Market rate)
a. Record the issuance of the note.
b. Determine the interest expense per year and the carrying amount of the note per year.
Case 4: The company issued a non-interest bearing promissory note for the entire value of the
building. The note is payable after three years. On the date of issuance, the market rates
averaged 9%. (Noninterest bearing note; Lump-Sum)
a. Record the issuance of the note.
b. Determine the interest expense per year and the carrying amount of the note per year.
Case 5: The company issued a noninterest bearing note equal to the entire value of the building.
The note is payable in equal annual installments of P5,000,000 starting December 31, 2023, and
every December 31 thereafter. On the same date, the market averaged 9%. (Noninterest bearing
note; Installment)
a. Record the issuance of the note.
b. Determine the interest expense per year and the carrying amount of the note per year.
