NOTE Payable Notes in Intermediate Accounting 2 PDF

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Summary

NOTE PAYABLEA promissory note in which the maker or issuer promises in writing to pay the sum certain in money to the payee either on demand of the payee or at a fixed time. Diff w/ AP-it has written promise to pay-normally it is interest bearingRecognition- When the entity becomes a party to the co...

Description

NOTE PAYABLE A promissory note in which the maker or issuer promises in writing to pay the sum certain in money to the payee either on demand of the payee or at a fixed time. Diff w/ AP -it has written promise to pay -normally it is interest bearing Recognition -When the entity becomes a party to the contract or when the transfer of resources transpired. Presentation ✓ Liability section ✓ Recognize either current or noncurrent depending on the expected settlement date. *Consider if it has single date of maturity/1 time payment or series of payments. ✓ Net carrying value

Measurement Basically, it is recognized as Financial Instrument at Fair Value and at amortized cost. Initial measurement: a. Not designated at FV through Profit or Loss = FV - Transaction Cost b. Irrevocably designated at FVPL = FV only (Transaction Costs are expensed immediately) Subsequent measurement: a. At amortized cost using effective interest method b. At FVPL NOTE: standard allows short-term NP to be measure at FACE AMOUNT(diff of FV & FA is immaterial) In the absence of FV, it should be measured at discounted or present value. 1. Note issued solely for cash Example:

➢ Present Value = Cash Proceeds

“On November 1, 2020, an entity discounted its own note of 1,000,000 at 12% for 1 year.” Step 1: Note Payable Less: Discount (1M x 12%) Net Proceeds

1,000,000 ( 120,000) 880,000

Step 2: Entry Nov. 1 Cash Discount on Note payable Note Payable

880,000 120,000 1,000,000

Step 3: Dec. 31 Interest Expense 20,000 Discount on Note Payable 20,000

Step 4: Statement of Financial Position 12/31/2021 Current Liability: Note payable 1,000,000 Discount on Note Payable ( 100,000) Carrying amount 900,000

120,000 x 2/12 = 20,000 *Nov. 1 - Dec 31= 2 months

Beg. bal of discount Amortized End. bal of discount

2. Interest bearing note issued for property Example:

120,000 ( 20,000) 100,000

➢ Property = Purchase Price ➢ Purchase Price = Present Value (the FV of the property)

“On Jan. 1, 2021, an entity acquired an equipment for ₱1,000,000 payable in 5 equalannual installments every December 31 each year. interest is 10% on the unpaid balance.” Step 1: 2021 Jan. 1 Equipment 1,000,000 Note Payable 1,000,000 Step 2: Dec. 31 Interest Expense (1Mx10%) 100,000 Note Payable 200,000 Cash 300,000 Step 3: 2022 Dec. 31 Interest Expense (NP bal. 800,000 x10%) Note Payable Cash 3. Noninterest bearing note issued for property

80,000 200,000 280,000 ➢ Cash Price = Present Value of note issued

NOTE : "No lender would part away with his money or property interest-free." Cash Price Less: Face of the Note Imputed Interest

Example: "On Jan. 1, 2021, an entity acquired an equipment with a cash price of ₱350,000 for ₱500,000, ₱100,000 down and the balance payable in 4 equal annual installments." Step 1: Jan. 1 Equipment Discount on Note Payable Cash Note Payable Step 2: Dec. 31 Notes payable Cash

Cash Price Less: Face of the Note Imputed Interest

350,000 150,000 100,000 400,000

100,000 100,000

Dec. 31. Interest expense Discount on notes payable Step 3: Amortization Table: Year Note Payable 2020 400,000 2021 300,000 2022 200,000 2023 100,000 Total 1,000,000

4/10 3/10 2/10 1/10

60,000 60,000

Fraction 400,000/1,000,000 300,000/1,000,000 200,000/1,000,000 100,000/1,000,000

Amortization 60,000 45,000 30,000 15,000 150,000

✓ When there is no cash price Step 1: ➢ PV of Note payable without down payment: ➢

Cost of property = Present value of the notes payable Annual installment x PV of an ordinary annuity

➢

PV of Note payable with down payment: ➢ Cost of property = Down payment + Present value of the notes payable a. Amount of notes payable - down payment b. a. /number of installment years c. Effective rate x b

Step 2: Discount on notes payable = Face value - Present Value of notes payable Step 3: Table of Amortization

350,000 (500,000) 150,000

Example: “On January 1, 2021 an entity acquired an equipment for ₱1,000,000 payable in 5 equal annual installments on every December 31 of each year. The rate of 10% is assumed to be the prevailing market rate of interest. The PV of an ordinary annuity of 1for 5 years at 10% is 3.7908” Step 1: Cost of property = 1M/5 x 3.7908 = 758,160 Step 2: Discount on Note Payable = 1,000,000 - 758,160 = 241,840 Step 3: Table of amortization Date Jan 1, 2021 Dec 31, 2021 Dec 31, 2022 Dec 31, 2023 Dec 31, 2024 Dec 31, 2025

(a) Payment 200,000 200,000 200,000 200,000 200,000

(b) Interest 75,816 63,398 49,737 34,711 18,178

758,160*10%

200,000 – 181,822

(a - b) Principal 124,184 136,602 150,263 165,289 181,822

Present Value 758,160 633,976 497,374 347,111 181,822 0

758,160 – 124,184

✓ When note payable lump sum Step 1: ➢ Cost of property = Down payment + Present value of the notes payable a. Amount of note payable downpayment b. a x Effective rate

Step 2: Discount on notes payable (imputed interest) = FV of note - Present value of note Step 3: Table of amortization Example: “On January 1, 2021, an entity acquired an equipment for ₱1,000,000. The entity paid 100,000 down and signed a non-interest-bearing note for the balance which is due after three years on January 1, 2024. There was no established cash price for the equipment. The prevailing interest rate forthis type of note is 10%. The present value of 1 for 3 periods is .7513 Step 1: a. 1,000,000 - 100,000 down = 900,000 b. 900,000 x .7513 = 676,179 PV Cost of equipment = 100,000 down + 676,179 PV = 776,170

Step 2: Discount on Note Payable = face 900,000 - PV 676,170 = 223,830 Step 3: Table of amortization Date Jan. 1, 2021 Dec. 31, 2021 Dec. 31, 2022 Dec. 31, 2023

Interest Expense 67,617 74,379 81,834

Discount on note payable 223,830 676,170 x 10% 156,213 223,830 – 67,617 81,834 900,000 – 818,166 -

Present Value 676,170 743,787 818,166 900,000

676,170 + 67,617

4. FV option of measuring notes payable FVPL shall be accounted for as: 1. Change in FV attributable to the credit risk - OCI 2. Change in FV attributable to the interest risk (the remaining amount) – PL NOTE: Transaction cost is recognized as outright expense No Amortization of discount/ premium Interest expense is recognized using nominal/stated rate Gain from changes in FV = FV lower than initial measurement (decrease in FV) Loss from changes in FV = FV higher than initial measurement (increase in FV)...