ACTG 431 Week 10 Comprehensive Examination (Practical Accounting I) Notes Payable PDF

Preview

Summary

Week 10: Comprehensive Examination (Practical Accounting I)NOTES PAYABLENote PayableA 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 or determinable future time a sum certain in money to order or to b...

Description

Week 10: Comprehensive Examination (Practical Accounting I) NOTES PAYABLE Note 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 or determinable future time a sum certain in money to order or to bearer.

Initial measurement of note payable PFRS 9, par 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. However, if the note payable is irrevocable 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 payments to settle the note payable using market rate of interest.

Subsequent measurement of note payable PFRS 9, par 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 the note payable is the amount at which the note payable is measured initially: 1. Minus principal payment 2. 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 (i.e., discount or premium) b. At fair value through profit or loss if the note payable is designated irrevocably at fair value through profit or loss.

Note issued solely for cash When a note issued solely for cash, the present value is equal to cash proceeds.

Interest bearing note issued for property When a property or noncash asset is acquired by issuing a promissory note which is interest bearing, the property or asset is recorded at the purchase price. The purchase price is reasonably assumed to be the present value of the note payable and therefore, the fair value of the property because the note is issued is interest bearing.

Note bearing note issued for property When a noninterest bearing note is issued for property, the property is recorded at the cash price of the property. The cash price is assumed to be the present value of the note issued. The difference between the cash price and the face of the note issued represents the imputed interest.

Fair value option of measuring note payable PFRS 9, par 4.2.2, provides that at initial recognition, a note payable may be irrevocably designated as fair value through profit or loss. PFRS 9, par 5.7.7, 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. Any amount recognized in other comprehensive income resulting from changes in fair value attributable to credit risk shall not be subsequently transferred to profit or loss. b. The remaining amount of change in fair value is recognized in profit or loss. Under the fair value option, any transaction cost is recognized as outright expense. There is no amortization of discount and premium on note payable....