NOTES PAYABLE
LECTURE DRILLS
Problem 1
On September 1, 2022, an entity borrowed on a ₱6,000,000 note payable from a bank. The note bears
interest at 12% and is payable in four equal annual principal payments of ₱1,500,000. On this date, the
bank’s prime rate was 10%. The first annual payment for interest and principal was made on September
1, 2023.
1. What is the interest expense for 2023?
a. 480,000
b. 660,000
c. 540,000
d. 550,000
2. On December 31, 2023, what amount should be reported as accrued interest payable?
a. 240,000
b. 180,000
c. 200,000
d. 150,000
Problem 2
An entity frequently borrowed from the bank in order to maintain sufficient operating cash. The
following loans were at a 12% interest rate with interest payable at maturity. The entity repaid each loan
on scheduled maturity date.
Date loan Amount Maturity Date Term of loan
November 1, 2021 500,000 October 31, 2022 1 year
February 1, 2022 1,500,000 July 31, 2022 6 months
May 1, 2022 3,000,000 January 31, 2023 9 months
The entity recorded interest expense when the loans are repaired. As a result, interest expense of
₱150,000 was recorded in 2022. If no correction is made, by what amount would interest expense be
understated for 2022?
a. 380,0000
b. 230,000
c. 240,000
d. 350,000
Problem 3
On March 1, 2022, an entity borrowed ₱5,000,000 and signed a 2-year note bearing interest at 12% per
annum compounded annually. Interest is payable in full at maturity on February 28, 2024. What amount
should be reported as accrued interest payable on December 31, 2023?
a. 1,160,000
b. 1,200,000
c. 560,000
d. 600,000
Problem 4
On December 31, 2022, an entity purchased a machine in exchange for a noninterest bearing note
requiring eight payments of ₱500,000. The first payment was made on December 31, 2022 and others
are due annually on December 31. At date of issuance, the prevailing rate of interest for this type of
note was 11%. The PV of an ordinary annuity of 1 at 11% for 8 periods is 5.146, and the PV of an annuity
of 1 in advance at 11% for 8 periods is 5.712.
1. On December 31, 2022, what is the carrying amount of the note payable?
a. 2,856,000
b. 2,573,000
c. 2,356,000
d. 2,073,000
2. What is the interest expense for 2023?
a. 314,160
b. 283,030
c. 259,160
d. 228,030
Problem 5
An entity reported the following liabilities on December 31, 2022:
Accounts payable 1,000,000
12% note payable issued November 1, 2021 maturing July 1, 2023 2,000,000
10% note payable issued October 1, 2021 maturing October 1, 2023 1,500,000
10% debentures payable, next annual principal installment of ₱500,000
due February 1, 2023 7,000,000
On January 31, 2023, the entity consummated a non-cancelable agreement with the lender to refinance
the 12% note payable on a long-term basis. On December 31, 2022, the entity has the right to roll over
the 10% note payable for at least 12 months after the end of reporting period. The December 31, 2022
financial statements were issued on March 31, 2023. In the December 31, 2022 statement of financial
position, what total amount should be reported as current liabilities?
a. 3,500,000
b. 5,000,000
c. 3,000,000
d. 1,500,000
Problem 6
On July 1, 2022, an entity borrowed ₱5,000,000 on a 10% five-year note payable. On December 31,
2022, the fair value of the note is determined to be ₱4,750,000 based on market and interest factors.
The entity has elected the fair value option for reporting the financial liability.
1. What amount should be reported as interest expense for 2022?
a. 500,000
b. 475,000
c. 250,000
d. 237,500
2. What amount of gain or loss should be recognized in 2022 as a result of the fair value option?
a. 250,000 gain
b. 250,000 loss
c. 125,000 gain
d. 125,000 loss
