BATANGAS STATE UNIVERSITY

The National Engineering University

Rizal Avenue Extension, Batangas City
College of Accountancy, Business Economics and International
Hospitality Management

INTERMEDIATE ACCOUNTING II
BS Management Accounting
1st Semester, AY 2024 - 2025
Reference: Conrado Valix, et.al

NOTES PAYABLE
A promissory note is an unconditional promise in writing made by one person to another, signed by the maker,
engaging to pay on demand or at a fixed determinable future time a sum certain in money to order or to bearer.

Initial measurement of note payable

PF S 9, paragraph 5.1.1, provides that a note payable not designated at fair value through profit or loss shall be
measured initially at fair value minus transaction costs that are directly attributable to the issue of the note payable.

In other words, transaction costs are included in the measurement of note payable.

However, if the note payable is irrevocably designated at fair value through profit or loss, the transaction costs are
expensed immediately.

The fair value of the note payable is equal to the present value of the future cash payment to settle the note payable
using market rate of interest.

Subsequent measurement of note payable

PFRS 9 paragraph 5.3.1, provides that after initial recognition, a note payable shall be measured:
a. At amortized cost using the effective interest method.
The amortized cost of note payable is the amount at which the note payable is measured initially minus
principal repayment plus or minus the cumulative amortization using the effective interest method of any
difference between the face amount and present value of the note payable.

b. At fair value through profit or loss if the note payable is designated irrevocably as measured at fair value
through profit or loss

Actually, the difference between the face amount and present value is either discount or premium on the issue of note
payable.

Note issued solely for cash

On November 1, 2024, an entity discounted its own note of Pl,000,000 at 12% for one year.

What amount should be reported as Net Proceeds?

Interest bearing note issued for property

On January 1, 2024, an entity acquired an equipment for Pl,000,000 payable in 5 annual equal instalments every
December 31 of each year. Interest is 10% on the unpaid balance.

What is the journal entry

a. To record the acquisition of the equipment?

b. To record the payment of first installment on December 31, 2024.

c. To record the payment of first installment on December 31, 2025.

ACC 309 Module 8 – Notes Payable

P a g e |1
 BATANGAS STATE UNIVERSITY
The National Engineering University
Rizal Avenue Extension, Batangas City
College of Accountancy, Business Economics and International
Hospitality Management

Noninterest bearing note

On January 1, 2024, an entity acquired an equipment with a cash price of P350,000 for P500,000, Pl00,000 down and
the balance payable in 4 equal annual instalments.

What is the journal entry

a. To record the acquisition of the equipment?

b. To record the payment of annual installment.

Prepare the table of amortization

Noninterest bearing note payable lump sum

On January 1, 2024, an entity acquired an equipment for Pl,000,000. The entity paid P100,000 down and signed a
noninterest bearing note payable" for the balance which is due after three years on December 31, 2026.

There was no established cash price for the equipment. The prevailing interest rate for this type of note is 10%. The
present value of 1 for 3 periods is .7513.

What is the journal entry

a. To record the acquisition of the equipment?

b. To record interest expense for 2024.

c. To record the full payment of the note on December 31, 2025.

Fair value option in measuring notes payable

PFRS 9, paragraph 4.2.2 provides that at initial recognition a note payable may be irrevocably designated as at fair
value through profit or loss.

PFRS 9 paragraph 5.7.7 provides that the gain or loss on financial liability designated at fair value through profit or
loss shall be recognized either in other comprehensive income or profit or loss.
a. The change in fair value attributable to the credit risk is recognized in other comprehensive income.
Credit risk is the risk that the issuer of the liability would cause a financial loss to the other party by failing to
discharge the obligation.

Credit risk does not include market risk such as interest risk, currency risk and price risk.
b. The remaining amount of the change in fair value attributable to interest and market factors is recognized in
profit or loss or reported in the income statement.

Application Guidance B5.7.9 provides that amount recognized in other comprehensive income resulting from change
in fair value attributable to credit risk shall not be subsequently transferred to profit or loss. However, the cumulative
gain or loss recognized may be transferred directly to retained earnings.

Under the fair value option, any transaction cost is recognized as outright expense. There is no amortization of
discount and premium on note payable. Interest expense is recognized using the nominal or stated interest rate. I

ACC 309 Module 8 – Notes Payable

P a g e |2
 BATANGAS STATE UNIVERSITY
The National Engineering University
Rizal Avenue Extension, Batangas City
College of Accountancy, Business Economics and International
Hospitality Management

Illustration:
On January 1, 2024, an entity borrowed from a bank P4,000,000 on a 12% 5-year interest bearing note. The entity
received P4,000,000 which is the fair value of the note on January 1, 2024. Transaction cost of Pl00,000 was paid by
the entity.

The fair _value of the note payable was P3,500,000 on December 31, 2024. The entity has elected irrevocably the fair
value option for measuring the note payable.

The change in fair value comprised P50,000 attributable to credit risk and P450 000 attributable to interest risk.

What is the journal entry

a. To record transaction on January 1, 2024?

b. To record transaction on December 31, 2024?

EXERCISES
1. On January 1, 2024, Joshua Company bought a new machine and agreed to pay in equal annual installment of
P600 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 6.36. 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?

What amount should be reported as interest expense for the first year?

What is the carrying amount of the note payable on December 31, 2024?

2. On March 1, 2023, Alpha Company borrowed P1,000,000 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, 2025.

What amount should be reported as accrued interest payable on December 31, 2024?

3. On December 31, 2024, Bart Company purchased a machine from Fell Company in exchange for a non interest
bearing note payable requiring eight payments of P200,000. The first payment was made on December 3 l,
2024 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 1 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, 2024, what is the carrying amount of the note payable?

What amount should be reported as interest expense for 2025?

ACC 309 Module 8 – Notes Payable

P a g e |3
 BATANGAS STATE UNIVERSITY
The National Engineering University
Rizal Avenue Extension, Batangas City
College of Accountancy, Business Economics and International
Hospitality Management

MULTIPLE CHOICES
1. When an entity issued a note payable solely in exchange of cash, the Present value of the note payable 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 payable issued in exchange for a property is less than face amount, the diffnce
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 noninterest 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. Which statement concerning discount on note payable is incorrect?

a. Discount on note payable may be debited when 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 the liability over
the life of the note.

ACC 309 Module 8 – Notes Payable

P a g e |4