SOL. MAN. Chapter 2 Notes Payable 2021 PDF

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Chapter 2Notes PayablePROBLEM 1: TRUE OR FALSE1. FALSE – interest payable = face amount x nominalrate2. TRUE (1,241,843 x 110% x 110%) = 1,502,630 carryingamount on Dec. 31, 20x 2M face amount - 1,502,630 = 497,3. TRUE4. FALSE (1M x PV of ordinary annuity of 1 @10%,n=3)5. TRUE6. FALSE 40,000 (400,...

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Chapter 2 Notes Payable PROBLEM 1: TRUE OR FALSE 1. FALSE – interest payable = face amount x nominal rate 2. 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 3. TRUE 4. FALSE (1M x PV of ordinary annuity of 1 @10%, n=3) 5. TRUE 6. FALSE 40,000 (400,000 cash price equivalent x 10%) 7. TRUE (100,000 x .90) = 90,000 x 10% = 9,000 8. TRUE (100,000 x .90 x 110% x 10%) = 9,900 OR (90,000 + 9,000) x 10% = 9,900 9. FALSE 850,000 (the note is payable in installments) 10. TRUE

PROBLEM 2: MULTIPLE CHOICE – THEORY 1. D – a note with below-market interest rate is discounted 2. A

Page | 2 3. C 4. A 5. D Choice (a) is incorrect because this refers to the income statement rather than the statement of financial position. 6. C 7. C 8. D 9. B 1st note: 6,000 x 18% = 1,080 interest expense; 2nd note: (7,080 ÷ 118%) x 18% = 1,080 interest expense 10. B Concept: Pre-acquisition accrued interest When interest has accrued before the issuance of an interest-bearing payable, the subsequent payment of interest is allocated between the pre-acquisition and post-acquisition periods. Only the portion pertaining to the post-acquisition period is recognized as interest expense. Mar. 1, 20x 1

Accounts payable Loss on derecognition of liability

6,000 120 6,000 120

(squeeze)

Notes payable Interest payable (6,000 x 12% x 2/12)

July. 1, 20x 1

Notes payable Interest expense (6,000 x 12% x 4/12)

Interest payable (from Mar. 1, 20x1) Cash [6,000 + (6,000 x 12% x 6/12)]

PROBLEM 3: EXERCISES 1. Solution: Cash flows

2,000,000

6,000 240 120 6,360

Page | 3 PV of 1 @16%, n=3 Present value 1/1/x1

Date 1/1/x1 12/31/x1 12/31/x2 12/31/x3

0.64066 1,281,320

Interest expense 205,011 237,813 275,856*

Discount 718,680 513,669 275,856 0

Present value 1,281,320 1,486,331 1,724,144 2,000,000

* Squeezed to eliminate difference due to rounding-off

1/1/x1 Equipment Discount on notes payable Notes payable 2,000,000

1,281,320 718,680

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

205,011

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 Cash

2,000,000

2,000,000

2. Solutions: Requirement (a): Cash flows PV ord. annuity @18%,

1,000,000

Page | 4 n=3 Present value 1/1/x1

Date

Payme nts

1/1/x1 12/31/ x1 12/31/ x2 12/31/ x3

1,000,0 00 1,000,0 00 1,000,0 00

2.17427 2,174,270 Interest expense

Amortizat ion

Present value 2,174,270

391,369

608,631

1,565,639

281,815

718,185

847,454

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.) Carrying amount, 12/31/x1 Discount on note payable, 12/31/x1

2,000,000 1,565,639 434,361

Current portion: Notes payable (1,000,000 due in 20x2) Discount on notes payable (1M – 718,185 current portion)

Notes payable, net (presented in current liabilities) Noncurrent portion: Notes payable (1,000,000 due in 20x3) Discount on notes payable (1M – 847,454 noncurrent portion)

Notes payable - net (presented in noncurrent liabilities)

Total notes payable, net - Dec. 31, 20x1

₱1,000,0 00 (281, 815) 718,1 85 1,000, 000 (152, 546) 847,4 54 ₱1,565,6 39

Page | 5 Requirement (c): 1/1/x1 Equipment Discount on notes payable Notes payable 3,000,000

2,174,270 825,730

12/31/x1 Notes payable Interest expense Discount on notes payable Cash

1,000,000 391,369 391,369 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

3. Solutions:  PV of note = (2M ÷ 4) x PV of an annuity due of P1 @12%, n=4  PV of note = 1,700,916 Date Jan. 1, 20x1 Jan. 1, 20x1 Jan. 1, 20x2 Jan. 1, 20x3 Jan. 1,

Payme nts

Interest expense

Amortizatio Presen n t value 1,700,9 16 1,200,9 500,000 16

500,000

-

500,000

144,110

355,890

845,026

500,000 500,000

101,403 53,571

398,597 446,429

446,429 -

Page | 6 20x4

Requirement (a): Jan. 1, Vehicle 20x1 Discount on notes payable Cash Notes payable Jan. 1, 20x1 Dec. 31, 20x1 Jan. 1, 20x2 Dec. 31, 20x2 Jan. 1, 20x3 Dec. 31, 20x3 Jan. 1, 20x4

1,900, 916 299,08 4

Notes payable Cash

500,00 0

Interest expense Discount on notes payable

144,11 0

Notes payable Cash

500,00 0

Interest expense Discount on notes payable Notes payable Cash

101,40 3

Interest expense Discount on notes payable Notes payable Cash

500,00 0

200,00 0 2,000, 000 500,00 0 144,11 0 500,00 0 101,40 3 500,00 0

53,571 53,571 500,00 0

500,00 0

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

845 ,026 500,000 1, 345,026

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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 1/1/x1 12/31/x1

400,000

12/31/x2

400,000

12/31/x3

400,000

(9) 12/31/x4

400,000

Interest expense

Amortizat ion

Present value

1,119,272 179,084 (6) 143,737 102,735 (10) 55,172

(5) 220,916

898,356 (7) 642,093

256,263 (8) 297,265

344,828

344,828

0

5. Solution: First step: Place the given information on the amortization table: Date 1/1/x1 12/31/x 1 12/31/x 2 12/31/x 3 12/31/x 4

Payment s

Interest expense

Amortizat ion

Present value

911,205 300,000 300,000

86,466

213,534

507,016

300,000 300,000

Second step: Squeeze for the carrying amount of the note on December 31, 20x1. Date 1/1/x1 12/31/x 1

Payment s

Interest expense

Amortizat ion

Present value

911,205 300,000

720,550*

Page | 8 12/31/x 2 12/31/x 3 12/31/x 4

300,000

86,466

213,534

507,016

300,000 300,000

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

Third step: Compute for the effective interest rate EIR = 86,466 ÷ 720,549 = 12% Fourth step: Squeeze for the other missing information Date 1/1/x1 12/31/x 1 12/31/x 2 12/31/x 3 12/31/x 4

Payment s

Interest expense

Amortizat ion

Present value

911,205 300,000

109,345

190,655

720,550

300,000

86,466

213,534

507,016

300,000

60,842

239,158

267,858

300,000

32,142*

267,858

-

* Squeezed to eliminate difference due to rounding-offs.

PROBLEM 4: MULTIPLE CHOICE – COMPUTATIONAL 1. D Interest expense in 20x4 (10,000 x 12% x 10/12) Interest expense in 20x5 [(10,000 + 1,000) x 12%] Interest payable (compounded) 12/31/x5

1,00 0 1,32 0 2,3 20

2. B Date 1/1/x1 12/31/x1 12/31/x2 12/31/x3 12/31/x4

Interest expense 428,815 493,137 567,108 652,174

Discount 2,141,234 1,712,419 1,219,282 652,174 (0)

Present value 2,858,766 3,287,581 3,780,718 4,347,826 5,000,000

Page | 9 Shortcut: F (5M x PV of 1 @15%, n=4) = 2,858,766; F 2,858,766 x 115% x 115% = 3,780,718; F 5M – 3,708,718 = 1,219,282 3. B  Shortcut: 418,250 - the cost of the annuity purchased.  Longcut: Reconciliation for the shortcut above 12/31/2000 Investment (annuity product) Cash 418,250 Contest prize expense (a) Discount on notes payable (1M – 468,250) Notes payable 1,000,000

418,250

468,250 531,750

Note payable Discount on note payable Carrying amount - 12/31/2000 Current portion of note (due on 1/2/2001) Noncurrent portion 12/31/2000 (equal to cost of annuity) (a)

Payment due on 1/2/2001 Cost of annuity purchased Contest prize expense (equal to carrying

amount of note)

1/2/2001 Notes payable Cash

1,000,00 0 (531,75 0) 468,250 (50,000) 418,25 0 50,000 418,250 468,250

50,000 50,000

4. C  Shortcut: 468,250 the total carrying amount of the note or (418,250 annuity + 50,000 payment = 468,250)

P a g e | 10  Longcut: see reconciliation above 5. A

Future cash flows Principal Semiannual int.

4,000, 000

PV factors @ 6%, n= 6 0.70496 4.91732

(4M x

1.5%)

a

60,000

Total a b

Present value 2,819,84 0

b

295,039 3,114,87 9

(PV of ₱1 @6%, n=6) (PV of ordinary annuity of ₱1 @6%, n=6

6. A Cash flow PV of annuity due of 1 @11%, n=8 PV of note on Dec. 30, 20x6 Less: First installment on Dec. 31, 20x6 PV of note on Dec. 31, 20x6

20,000 5.712 114,240 (20,000) 94,240

7. D  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 Monthly expenditure Minimum monthly take-home salary

8. A Monthly amortization Multiply by: (25 yrs. x 12 months) Total payments Cash selling price

147,451.3 8 36,6 00 184,051. 38

147,451.38 300 44,235,414 (14,000,000)

P a g e | 11 Total interest expense

30,235,414

9. C Loan payable Transaction costs (4M x 11.19%) Carrying amount 1/1/x1

4,000, 000 (447, 600) 3,552,4 00

Trial and error: (Principal: 4,000,000 x PV of 1 @ x%, n=4) + (Interest: 480,000 x PV ordinary annuity @ x%, n=4) = 3,552,400 First trial: @16% (Principal: 4,000,000 x PV of 1 @ 16%, n=4) + (Interest: 480,000 x PV ordinary annuity @ 16%, n=4) = 3,552,400 (4,000,000 x 0.55229) + (480,000 x 2.79818) = 3,552,400 (2,209,160 + 1,343,126) = 3,552,400 3,552,286 = 3,552,400 If the difference of ₱114 is deemed immaterial, 16% is regarded as the effective interest rate. 10.

C (194,000 x 12.4% x 1/12) = 2,005

PROBLEM 5: CLASSROOM ACTIVITY Plus points to the learner who went the extra mile and placed a description for the table.

P a g e | 12

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

PROBLEM 6: FOR CLASSROOM DISCUSSION 1. Solution:

Cash flows PV of 1 @17%,

1,600,000

P a g e | 13 n=3 Present value 1/1/x1

Date 1/1/x1 12/31/x 1 12/31/x 2 12/31/x 3

0.62437 998,992

Interest expense 169,829 198,700 232,479

1/1/x1 Land Discount on notes payable Notes payable 1,600,000

Discount on N/P 601,008

Present value 998,992

431,179

1,168,821

232,479

1,367,521

0

1,600,000

998,992 601,008

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 Cash

1,600,000 1,600,000

2. Solution: Requirement (a):

Cash flows

400,000

P a g e | 14 PV ord. annuity @17%, n=3 Present value - 1/1/x1

Date

Payme nts

2.209585 883,834

Interest expense

Amortizat ion

Present value 883,834

1/1/x1 12/31/x 150,252 249,748 634,086 400,000 1 12/31/x 107,795 292,205 341,881 400,000 2 12/31/x 58,119* 341,881 0 400,000 3 * Squeezed to eliminate difference due to rounding-off

1/1/x1 Land Discount on notes payable Notes payable 1,200,000

883,834 316,166

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 Interest expense Discount on notes payable Cash Requirement (b): Current portion: Notes payable (400,000 due in 20x2)

400,000 58,119 58,119 400,000

₱

P a g e | 15

Discount on notes payable (400K – 292,205 current portion)

Notes payable, net (presented in current liabilities) Noncurrent portion: Notes payable (400,000 due in 20x3) Discount on notes payable (400K – 341,881 noncurrent portion)

Notes payable - net (presented in noncurrent liabilities)

Total notes payable, net - Dec. 31, 20x1

400,000 (107,7 95) 292, 205 400,0 00 (58,11 9) 341, 881 ₱ 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): Payme Interest Date nts expense 1/1/x 1 1/1/x 1 1/1/x 2 1/1/x 3

400,000 400,000 400,000

69,422 36,363

Amortizat ion

Present value 1,094,215

400,000

694,215

330,578

363,637

363,637

(0)

Requirement (b): 69,422 – see table above. Requirement (c): Carrying amt. on 1/1/x2 Add back: Payment on 1/1/x2 Carrying amt. on 12/31/x1

36 3,637 40 0,000 7

P a g e | 16 63,637

4. Solutions: Requirement (a): Loan payable Transaction costs (3M x 4.8037%) Carrying amount - 1/1/x1

3,000,0 00 (144, 111) 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): Payme Date nts 1/1/x1 12/31/ x1 12/31/ x2 12/31/ x3

300,000 300,000 300,000

Interest expense

Amortizat ion

Present value 2,855,889

342,707

42,707

2,898,596

347,832

47,832

2,946,428

353,572

53,572

3,000,000

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