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Chapter 2
Notes Payable

PROBLEM 1: TRUE OR FALSE

1. TRUE
2. FALSE – debtor
3. FALSE
4. TRUE
5. FALSE - 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.” (PFRS 13.Appdx. A)

Hint: For an asset, fair value is selling price in the principal

market.

6.FALSE
7.TRUE
8.TRUE
➢ (1,241,843 x 110% x 110%) = 1,502,630 carrying amount on Dec.
31, 20x2
➢ 2M face amount - 1,502,630 = 497,370

9. FALSE
10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY

1. C – Unearned revenue is not a short-term note payable. Choice
(b) can be acceptable because a nontrade note payable that is
due within 1 year is a short-term note payable.

2. C
3. D – a note with below-market interest rate is discounted
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4. D – the recognition of interest expense does not affect the

carrying amount of the machine
5. C
6. A
7. B
8. D – The note is due in lump sum. Accordingly, it is presented
as noncurrent during its term and presented as current only a
year before its maturity date.

9. D
10. C

PROBLEM 3: EXERCISES

1. Solution:
Cash flows 2,000,000
PV of 1 @16%, n=3 0.64066
Present value - 1/1/x1 1,281,320

Date Interest expense Discount Present value

1/1/x1 718,680 1,281,320
12/31/x1 205,011 513,669 1,486,331
12/31/x2 237,813 275,856 1,724,144
12/31/x3 275,856* 0 2,000,000
* Squeezed to eliminate difference due to rounding-off

1/1/x1
Equipment 1,281,320
Discount on notes payable 718,680
Notes payable 2,000,000

12/31/x1
Interest expense 205,011
Discount on notes payable 205,011
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12/31/x2
Interest expense 237,813
Discount on notes payable 237,813

12/31/x3
Interest expense 275,856
Discount on notes payable 275,856

Note payable 2,000,000

Cash 2,000,000

2. Solutions:

Requirement (a):
Cash flows 1,000,000
PV ord. annuity @18%, n=3 2.17427
Present value - 1/1/x1 2,174,270

Date Payments Interest expense Amortization Present value

1/1/x1 2,174,270
12/31/x1 1,000,000 391,369 608,631 1,565,639
12/31/x2 1,000,000 281,815 718,185 847,454
12/31/x3 1,000,000 152,546* 847,454 0
* Squeezed to eliminate difference due to rounding-off

Current portion = 718,185

Noncurrent portion = 847,454

Requirement (b):
Future cash payments (1M x 2 yrs.) 2,000,000
Carrying amount, 12/31/x1 1,565,639
Discount on note payable, 12/31/x1 434,361
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Current portion:
Notes payable (1,000,000 due in 20x2) ₱1,000,000
Discount on notes payable (1M – 718,185 current portion) (281,815)
Notes payable, net (presented in current liabilities) 718,185
Noncurrent portion:
Notes payable (1,000,000 due in 20x3) 1,000,000
Discount on notes payable (1M – 847,454 noncurrent portion) (152,546)
Notes payable - net (presented in noncurrent liabilities) 847,454
Total notes payable, net - Dec. 31, 20x1 ₱1,565,639

Requirement (c):
1/1/x1
Equipment 2,174,270
Discount on notes payable 825,730
Notes payable 3,000,000

12/31/x1
Notes payable 1,000,000
Interest expense 391,369
Discount on notes payable 391,369
Cash 1,000,000

12/31/x2
Notes payable 1,000,000
Interest expense 281,815
Discount on notes payable 281,815
Cash 1,000,000

12/31/x3
Notes payable 1,000,000
Interest expense 152,546
Discount on notes payable 152,546
Cash 1,000,000
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3. Solutions:
➢ PV of note = (2M ÷ 4) x PV of an annuity due of P1 @12%, n=4
➢ PV of note = 1,700,916

Interest Present
Date Payments expense Amortization value
Jan. 1, 20x1 1,700,916
Jan. 1, 20x1 500,000 - 500,000 1,200,916
Jan. 1, 20x2 500,000 144,110 355,890 845,026
Jan. 1, 20x3 500,000 101,403 398,597 446,429
Jan. 1, 20x4 500,000 53,571 446,429 -

Requirement (a):
Jan. 1, Vehicle 1,900,916
20x1
Discount on notes payable 299,084
Cash 200,000
Notes payable 2,000,000
Jan. 1, Notes payable 500,000
20x1
Cash 500,000
Dec. 31, Interest expense 144,110
20x1
Discount on notes payable 144,110
Jan. 1, Notes payable 500,000
20x2
Cash 500,000
Dec. 31, Interest expense 101,403
20x2
Discount on notes payable 101,403
Jan. 1, Notes payable 500,000
20x3
Cash 500,000
Dec. 31, Interest expense 53,571
20x3
Discount on notes payable 53,571
Jan. 1, Notes payable 500,000
20x4
Cash 500,000

Requirement (b):
Interest expense in 20x2 = 101,403
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Requirement (c):
Carrying amt. on 1/1/x2 845,026
Add back: Payment on 1/1/x2 500,000
Carrying amt. on 12/31/x1 1,345,026

4. Solution:
Face amount (1) (400,000 x 4) = 1,600,000
Discount on N/P on initial recognition (2) (1.6M – 1,119,272) = 480,728
Effective interest rate (3) (179,084 ÷ 1,119,272) = 16%
Term of the note (in years) (4) 4 years

Date Payments Interest expense Amortization Present value

1/1/x1 1,119,272
12/31/x1 400,000 179,084 (5) 220,916 898,356
12/31/x2 400,000 (6) 143,737 256,263 (7) 642,093
12/31/x3 400,000 102,735 (8) 297,265 344,828
(9) 12/31/x4 400,000 (10) 55,172 344,828 0

5. Solution:
First step: Place the given information on the amortization table:
Date Payments Interest expense Amortization Present value
1/1/x1 911,205
12/31/x1 300,000
12/31/x2 300,000 86,466 213,534 507,016
12/31/x3 300,000
12/31/x4 300,000

Second step: Squeeze for the carrying amount of the note on

December 31, 20x1.
Date Payments Interest expense Amortization Present value
1/1/x1 911,205
12/31/x1 300,000 720,550*
12/31/x2 300,000 86,466 213,534 507,016
12/31/x3 300,000
12/31/x4 300,000

* (213,534 + 507,016) = 720,550

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Third step: Compute for the effective interest rate

EIR = 86,466 ÷ 720,549 = 12%

Fourth step: Squeeze for the other missing information

Date Payments Interest expense Amortization Present value
1/1/x1 911,205
12/31/x1 300,000 109,345 190,655 720,550
12/31/x2 300,000 86,466 213,534 507,016
12/31/x3 300,000 60,842 239,158 267,858
12/31/x4 300,000 32,142* 267,858 -

* Squeezed to eliminate difference due to rounding-offs.

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL

1. A
Interest expense in 20x1 (120,000 x 10% x 3/12) 3,000
Interest expense in 20x2 [(120,000 + 3,000) x 10%] 12,300
Interest payable (compounded) - 12/31/x2 15,300

2. A – The note payable is initially measured at face amount

because the problem states that the interest payments are
based on a reasonable interest rate.

3. D – The total carrying amount of the note is presented as

noncurrent liability.

4. C
Initial measurement:
Cash flows PV of 1 @10% PVF PV
Dec. 31, 20x1 2,400,000 n=1 0.909091 2,181,818
Dec. 31, 20x2 1,600,000 n=2 0.826446 1,322,314
Dec. 31, 20x3 800,000 n=3 0.751315 601,052
4,105,184
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Subsequent measurement:
Interest Present
Date Payments expense Amortization value
Jan. 1, 20x1 4,105,184
Dec. 31, 20x1 2,400,000 410,518 1,989,482 2,115,702

5. B
➢ Shortcut: 418,250 – equal to the cost of the annuity purchased.
➢ Longcut: Reconciliation for the shortcut above

12/31/2000
Investment (annuity product) 418,250
Cash 418,250

Contest prize expense (a) 468,250

Discount on notes payable (1M – 468,250) 531,750
Notes payable 1,000,000

Note payable 1,000,000

Discount on note payable (531,750)
Carrying amount - 12/31/2000 468,250
Current portion of note (due on 1/2/2001) (50,000)
Noncurrent portion 12/31/2000 (equal to cost of annuity) 418,250

(a) Payment due on 1/2/2001 50,000

Cost of annuity purchased 418,250
Contest prize expense (equal to carrying amount of note) 468,250

1/2/2001
Notes payable 50,000
Cash 50,000
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6. C
➢ Shortcut: 468,250 the total carrying amount of the note or
(418,250 cost of annuity + 50,000 payment = 468,250)
➢ Longcut: see reconciliation above

7. B
Future cash flow 4,000,000
Multiply by: PV of ₱1, @12%, n=3 0.71178
Present value 2,847,120

The entry to record the note is as follows:

Jan. Cash 4,000,000
1,
Discount on N/P (4M – 2,847,120) 1,152,880
20x1
Note payable 4,000,000
Unrealized gain 1,152,880
Dec. Interest expense (2,847,120 x 12%) 341,654
31,
Discount on N/P 341,654
20x1

Interest expense (341,654)

Unrealized gain, Day-1 difference 1,152,880
Net effect in 20x1 profit or loss - increase 811,226

8. B
➢ Future cash flows x (PV of ordinary annuity of 1 @1%, n=300) =
14,000,000
➢ Future cash flows x 94.9465512548 = 14,000,000
➢ Future cash flows = 14,000,000 ÷ 94.9465512548
➢ Future cash flows (monthly payment) = ₱147,451.38

Monthly amortization 147,451.38

Monthly expenditure 36,600
Minimum monthly take-home salary 184,051.38
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9. C
Monthly amortization 147,451.38
Multiply by: (25 yrs. x 12 months) 300
Total payments 44,235,414
Cash selling price (14,000,000)
Total interest expense 30,235,414

10. C
Initial measurement:
Loan payable 5,000,000
Transaction costs (5M x 8.74%) (437,000)
Carrying amount - 1/1/x1 4,563,000

Subsequent measurement:
Trial and error:
➢ (Principal: 5,000,000 x PV of 1 @ x%, n=4) + (Interest: 550,000 x PV
ordinary annuity @ x%, n=4) = 4,563,000

First trial: @14%

➢ (Principal: 5,000,000 x PV of 1 @ 16%, n=4) + (Interest: 550,000 x
PV ordinary annuity @ 16%, n=4) = 4,563,000
➢ (5,000,000 x 0.59208) + (550,000 x 2.91371) = 4,563,000
➢ (2,960,400 + 1,602,541) = 4,563,000
➢ 4,562,941 = 4,563,000 (If the difference of ₱60 is deemed
immaterial then 14% is regarded as the effective interest rate).

Date Payments Interest expense Amortization Present value

1/1/x1 4,563,000
12/31/x1 550,000 638,820 88,820 4,651,820
12/31/x2 550,000 651,255 101,255 4,753,075
12/31/x3 550,000 665,430 115,430 4,868,505
12/31/x4 550,000 681,495 131,495 5,000,000
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PROBLEM 5: CLASSROOM ACTIVITY

Plus points to the learner who went the “extra mile”

and placed a description for the table.

*********** portion deliberately not presented to save space*****

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PROBLEM 6: FOR CLASSROOM DISCUSSION

1. Solution:
Cash flows 1,600,000
PV of 1 @17%, n=3 0.62437
Present value - 1/1/x1 998,992

Date Interest expense Discount on N/P Present value

1/1/x1 601,008 998,992
12/31/x1 169,829 431,179 1,168,821
12/31/x2 198,700 232,479 1,367,521
12/31/x3 232,479 0 1,600,000

1/1/x1
Land 998,992
Discount on notes payable 601,008
Notes payable 1,600,000

12/31/x1
Interest expense 169,829
Discount on notes payable 169,829

12/31/x2
Interest expense 198,700
Discount on notes payable 198,700

12/31/x3
Interest expense 232,479
Discount on notes payable 232,479

Notes payable 1,600,000

Cash 1,600,000
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2. Solution:
Requirement (a):
Cash flows 400,000
PV ord. annuity @17%, n=3 2.209585
Present value - 1/1/x1 883,834

Date Payments Interest expense Amortization Present value

1/1/x1 883,834
12/31/x1 400,000 150,252 249,748 634,086
12/31/x2 400,000 107,795 292,205 341,881
12/31/x3 400,000 58,119* 341,881 0
* Squeezed to eliminate difference due to rounding-off

1/1/x1
Land 883,834
Discount on notes payable 316,166
Notes payable 1,200,000

12/31/x1
Notes payable 400,000
Interest expense 150,252
Discount on notes payable 150,252
Cash 400,000

12/31/x2
Notes payable 400,000
Interest expense 107,795
Discount on notes payable 107,795
Cash 400,000

12/31/x3
Notes payable 400,000
Interest expense 58,119
Discount on notes payable 58,119
Cash 400,000
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Requirement (b):
Current portion:
Notes payable (400,000 due in 20x2) ₱ 400,000
Discount on notes payable (400K – 292,205 current portion) (107,795)
Notes payable, net (presented in current liabilities) 292,205
Noncurrent portion:
Notes payable (400,000 due in 20x3) 400,000
Discount on notes payable (400K – 341,881 noncurrent portion) (58,119)
Notes payable - net (presented in noncurrent liabilities) 341,881
Total notes payable, net - Dec. 31, 20x1 ₱ 634,086

3. Solutions:

Initial measurement:
(1.2M ÷ 3) = 400,000;
400,000 x PV of an annuity due of ₱1 @10%, n=3 = 1,094,215

Requirement (a):
Date Payments Interest expense Amortization Present value
1/1/x1 1,094,215
1/1/x1 400,000 - 400,000 694,215
1/1/x2 400,000 69,422 330,578 363,637
1/1/x3 400,000 36,363 363,637 (0)

Requirement (b):
69,422 – see table above.

Requirement (c):
Carrying amt. on 1/1/x2 363,637
Add back: Payment on 1/1/x2 400,000
Carrying amt. on 12/31/x1 763,637
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4. Solutions:

Requirement (a):
Loan payable 3,000,000
Transaction costs (3M x 4.8037%) (144,111)
Carrying amount - 1/1/x1 2,855,889

Requirement (b):
Trial and error:

Working formula:
(Principal: 3,000,000 x PV of 1 @ x%, n=3) + (Interest: 300,000 x PV
ordinary annuity @ x%, n=3) = 2,855,889

First trial: @12%

(Principal: 3,000,000 x PV of 1 @ 12%, n=3) + (Interest: 300,000 x PV
ordinary annuity @ 12%, n=3) = 2,855,889
(3,000,000 x 0.711780) + (300,000 x 2.401831) = 2,855,889
(2,135,340 + 720,549) = 2,855,889
2,855,889 = 2,855,889

❖ The effective interest rate is 12%.

Requirement (c):
Interest
Date Payments expense Amortization Present value
1/1/x1 2,855,889
12/31/x1 300,000 342,707 42,707 2,898,596
12/31/x2 300,000 347,832 47,832 2,946,428
12/31/x3 300,000 353,572 53,572 3,000,000