FINANCIAL LIABILITIES

MODULE 1 :
INTRODUCTION TO LIABILITIES
ACCOUNTS PAYABLE AND NOTES PAYABLE
 LIABILITY

- A present obligation of the entity to transfer an economic resource as a result of past events (Chapter 4,
Revised Conceptual Framework).
- A present obligation arising from a past event, the settlement of which is expected to result in an outflow from
the enterprise of resources embodying economic benefits.

3 Essential characteristics of a liability:

1. A PRESENT OBLIGATION
OBLIGATION – duty or responsibility that the entity has no practical ability to avoid.
1. Legal obligation – derives from a contract, legislation or other operation of law.
2. Constructive obligation – derives from enterprise’s actions whereby an established pattern of past
practice, published policies or specific current statement, the enterprise has indicated to other parties that it
will accept certain responsibilities and as a result, the enterprise has created a valid expectation on the part of
those other parties that it will discharge those responsibilities.
2. A PAST EVENT
• The liability will arise if the entity acquires legally or constructively the title to the goods or when services
are already rendered.

3.TRANSFER OF ECONOMIC RESOURCES

- The settlement of a liability requires a transfer of economic resources which may be settled in different ways:
✓ Payment of cash
✓ Transfer of other assets
✓ Render of services
✓ Replacement of an obligation with another obligation
✓ Conversion of obligation to equity
✓ Condonation by creditor
 FINANCIAL LIABILITIES

• A financial liability is any liability that is a contractual obligation

a.) To deliver cash or another financial asset to another entity, or
b.) To exchange financial assets or financial liabilities to another entity under conditions that are potentially
unfavorable to the entity, or
c.) will be settled in the entity’s own equity instruments and is a non-derivative for which the entity may be
obliged to deliver a variable number of the entity’s own equity instruments ,or
d.) that will or may be settled in the entity’s own equity instruments and is a derivative that will or may be settled
other than by exchange of a fixed amount of cash or a financial asset for a fixed number of the entity’s own equity
instrument.
INITIAL RECOGNITION : Transaction Price/ Fair value
→ For financial liabilities measured at amortized cost, any transaction costs directly attributable to the issuance
of the financial instrument is considered in the initial measurement.

SUBSEQUENT MEASUREMENT:
→Except for financial liabilities that are measured at fair value, financial liabilities are measured at amortized cost.

PRESENTATION IN THE STATEMENT OF FINANCIAL POSITION:

→ Financial liabilities are classified as current and non-current liabilities.

SOME EXAMPLES OF FINANCIAL LIABILITIES:

→Accounts payable
→Notes payable
→Bonds payable
→Mortgage payable
 CURRENT OR NON-CURRENT?

A liability shall be classified as current if:

➢it is held primarily for the purpose of being traded;
➢it is expected to be settled in the entity’s normal operating cycle;
➢it is due to be settled within twelve months after the balance sheet date;
or
➢the entity does not have an unconditional right to defer settlement of the
liability for at least twelve months after the balance sheet date.
 ACCOUNTS PAYABLE

• Liabilities arising from the purchase of goods, materials, supplies, or services on an open charge-account
basis.
• Credit period varies from 30 to 120 days without any interest being charged on the deferred payment.
• The accounts payable must be recognized in the books of the entity at the time it acquired economic
control over the goods ordered.
• Transfer of title depends on the terms of purchase (which could either be FOB Shipping point or FOB
Destination)
• May be subjected to cash discounts (incentives for early payment; ex. 2/10,n/30 or 2/10, 1/15, n/30 )
 ACCOUNTING FOR CASH DISCOUNTS

Cash discounts may be recorded using either

a.) GROSS METHOD

- If the entity adopts the Periodic Inventory System, the Purchases account and the Accounts payable account
are recorded at the gross invoice price while under the Perpetual Inventory System, the Merchandise
Inventory and the Accounts payable accounts are recorded at gross.
- A cash discount taken is recognized only at the time of payment as a credit to Purchase Discount under Periodic
Inventory System and a credit to Merchandise Inventory account if the Perpetual Inventory System was used.
- Purchase Discount account is presented in the profit or loss section as a deduction to Purchases account under
Periodic Inventory System.
 ACCOUNTING FOR CASH DISCOUNTS

b.) NET METHOD

- If the entity adopts the Periodic Inventory System, the Purchases and the Accounts payable account are
recorded at net of the cash discount while under Perpetual Inventory System, the Merchandise Inventory and
the Accounts payable accounts are recorded at net of cash discount.

- The Purchase discount is recognized even not taken. Under the Periodic Inventory System, If payment is done after
the discount period, a Purchase discount lost is recognized, which is taken to profit or loss section of the Statement
of Comprehensive Income as part of finance cost and not capitalized to the inventory account.
 ILLUSTRATIVE PROBLEM:

On December 24, 2019, ABC Company purchased merchandise from DEF Company with trade discounts of 10% and
15%. The list price is P 500,000 with payment terms of 2/10, n/30. Assume the company uses periodic method to
account for their inventories.

December 24, 2019 Purchases 382,500 Purchases 374,850

Accounts payable 382,500 Accounts payable 374,850
P500,000 x 90% x 85%= P382,500 P382,500 x 98%= =P374,850

If the accounts payable is paid within the discount period, let’s say on December 28, 2019:
Accounts payable 382,500 Accounts payable 374,850
December 28, 2019 Purchase discount 7,650 Cash 374,850
Cash 374,850
If payment is made beyond the discount period, let’s say on January 13, 2019:

Accounts payable 382,500 Accounts payable 374,850

January 13, 2020 Cash 382,500 Purchase discount lost 7,650
Cash 382,500
 NOTES PAYABLE

• A written promise to pay a certain sum of money to the bearer at a designated future time.

CHARACTERISTICS: TYPES OF NOTES:

- Evidenced by a promissory note. a.) Interest bearing (with realistic or
unrealistic interest rates)
- It has an interest rate.
b.) Non- interest bearing
- Maturity value
- Maturity date
TYPES OF INTEREST RATES:
a. Stated or Nominal Interest Rate
b. Effective or Market or Yield Rate
SAMPLE PROMISSORY
NOTES
 NOTES WITH REALISTIC INTEREST RATE

• Notes with realistic interest rates are those with stated rates that approximates the prevailing market rate for
similar obligations.
• Also, the fair value / present value of the note at the date of issuance is equal to its face value. Basically, these
are the interest-bearing notes.

• Some example of these notes may either be:

a.) Long-term notes with principal and interest payable periodically or
b.) Long-term notes with principal matures in lump sum and interest is payable periodically
 ILLUSTRATIVE PROBLEM:
L O N G T E R M N OT E S W I T H P R I N C I PA L M AT U R E S
I N L U M P S U M A N D I N T E R E S T I S PAYA B L E
P E R I O D I C A L LY

On January 1,2019, ACT Company issued a 3-year, P 4,500,000, 10% promissory note for the purchase of an equipment due
on December 31, 2021. Interest is payable annually every December 31.The company’s reporting date is every December 31.

ENTRIES IN THE BOOKS OF

ACT COMPANY:

2019 2021
Jan. 1 Equipment P 4,500,000 Dec. Interest Expense 450,000
Notes payable P 4,500,000 31
Notes payable 4,500,000
Dec. 31 Interest Expense 450,000 Cash 4,950,000
Cash 450,000
( 4,500,000 x 10% )

2020

Dec. 31 Interest Expense 450,000

Cash 450,000
( 4,500,000 x 10% )
At the end of each reporting period, the amount of notes payable as well as any interest accrued that is due within one year
shall be classified as current liabilities.

Thus, in the statement of financial position at Dec 31 of 2019, 2020 and 2021, the notes payable shall be classified as:

2019 2020 2021

Current Liabilities:
Notes Payable 0 4,500,000 0
Interest payable 0 0 0

Non-current Liabilities:
Notes Payable 4,500,000 0 0
 WHAT IF THE NOTES WAS ISSUED DURING THE YEAR?

To illustrate, assuming the same problem but ACT Company issued on June 30, 2019 a 3-year, P 4,500,000, 10% promissory
note for the purchase of an equipment due on December 31,2021. Interest is payable annually every June 30. The
company’s reporting date is every December 31.

ENTRIES IN THE BOOKS OF

ACT COMPANY :

2019
June 30 Equipment P 4,500,000
Notes payable P 4,500,000

Dec. 31 Interest Expense 225,000

Interest payable 225,000
( 4,500,000 x 10% x 6/12 )

2020

June 30 Interest Expense 225,000

Interest payable 225,000
Cash 450,000
2020
Dec. 31
At the end of each reporting period, the amount of notes
Interest Expense 225,000
Interest payable 225,000 payable as well as the interest accrued that is due within one
year shall be classified as current liabilities.
2021
June 30 Interest Expense 225,000 Thus, in the statement of financial position at Dec 31 of 2019,
Interest payable 225,000 2020 and 2021, the notes payable and interest payable shall
Cash 450,000 be classified as:

Dec. 31 Interest Expense 225,000

Interest payable 225,000
2019 2020 2021 2022
2022
June 30 Interest payable 225,000
Current
Interest Expense 225,000
Liabilities:
Notes payable 4,500,000 Notes Payable 0 0 4,500,000 0
Cash 4,950,000 Interest payable 225,000 225,000 225,000
Non-current
Liabilities:
Notes Payable 4,500,000 4,500,000 0 0
 ILLUSTRATIVE PROBLEM:
L O N G T E R M N OT E S W I T H P R I N C I PA L A N D
I N T E R E S T PAYA B L E P E R I O D I C A L LY

On January 1, 2019, ACT Company issued a P 4,500,000, 10% promissory note for the purchase of an equipment.
Equal principal amount plus interest on the outstanding balance of the principal are payable annually every December
31 starting December 31, 2019.The company’s reporting date is every December 31.

With this, the following amounts will be paid from 2019 to 2021:

Due date Principal Due Interest due Total Amount

Due
December 31, 2019 1,500,000 4.5M X 10% = 450,000 1,950,000
December 31, 2020 1,500,000 3M X 10% = 300,000 1,800,000
December 31, 2021 1,500,000 1.5M X 10% = 150,000 1,650,000
 At the end of each reporting period, the amount of
ENTRIES IN THE BOOKS OF notes payable that is due within one year shall be
ACT COMPANY : classified as current liabilities.

2019 Thus, in the statement of financial position at Dec 31

Jan. 1 Equipment P 4,500,000
Notes payable P 4,500,000
of 2019, 2020 and 2021, the notes payable shall be
classified as:
Dec. 31 Interest Expense 450,000
Notes payable 1,500,000
2019 2020 2021
Cash 1,950,000

2020
Current
Dec. 31 Liabilities: 1,500,000 1,500,000 0
Interest Expense 300,000
Notes Payable
Notes payable 1,500,000
Cash 1,800,000 Non-current
Liabilities: 1,500,000 0 0
Notes Payable
2021

Dec. 31 Interest Expense 150,000

Notes payable 1,500,000
Cash 1,650,000
 WHAT IF THE NOTES WAS ISSUED DURING THE YEAR?

To illustrate, assuming the same problem but ACT Company issued on June 30, 2019 a P 4,500,000, 10% promissory note
for the purchase of an equipment. Equal principal amount plus interest on the outstanding balance of the principal are
payable annually every June 30 starting June 30,2020.The company’s reporting date is every December 31.

With this, the following amounts will be paid from 2020 to 2022:

Due date Principal Due Interest due Total Amount

Due
June 30, 2020 1,500,000 4.5M X 10% = 450,000 1,950,000
June 30, 2021 1,500,000 3M X 10% = 300,000 1,800,000
June 30, 2022 1,500,000 1.5M X 10% = 150,000 1,650,000
 ENTRIES IN THE BOOKS OF
ACT COMPANY :

2019 2021
June 30 Equipment P 4,500,000 June 30 Interest Expense* 150,000
Notes payable P 4,500,000 Interest payable 150,000
Notes payable 1,500,000
Dec. 31 Interest Expense 225,000 Cash 1,800,000
Interest payable 225,000 * From Jan 1 – June 30 2021 (3,000,000 x 10% x 6/12)
( 4,500,000 x 10% x 6/12)
Dec. 31 Interest Expense 75,000
2020 Interest payable 75,000
( 1,500,000 x 10% x 6/12)
June 30 Interest Expense* 225,000
Interest payable 225,000 2022
Notes payable 1,500,000 June
Cash 1,950,000 30 Interest Expense* 75,000
* From Jan 1- June 30 2020 (4,500,000 x 10% x 6/12) Interest payable 75,000
Notes payable 1,500,000
Dec. 31 Interest Expense 150,000 Cash 1,650,000
Interest payable 150,000 * From Jan 1 – June 30 2022 (1,500,000 x 10% x 6/12)
( 3,000,000 x 10% x 6/12)
At the end of each reporting period, the amount of notes payable as well as the interest accrued that is due within one year
shall be classified as current liabilities.

Thus, in the statement of financial position at Dec 31 of 2019, 2020 and 2021, the notes payable shall be classified as:

2019 2020 2021 2022

Current Liabilities:
Notes Payable 1,500,000 1,500,000 1,500,000 0
Interest payable 225,000 150,000 75,000 0

Non-current Liabilities:
Notes Payable 3,000,000 1,500,000 0 0
 NOTES WITH UNREALISTIC INTEREST RATE

• Notes with unrealistic interest rates are those:

a.) interest rate appearing on the face of the note is significantly different from the market rate of similar notes; or
b.) the consideration received on account of the note issued has a fair value that is significantly different from the face value of the note.
• The note and interest to be paid based on the stated rate shall be discounted at the market rate of interest on the date of issuance.
• If STATED RATE > EFFECTIVE RATE OF INTEREST
→ Discounted amount / Present value > Face value of the note = Premium on Notes payable
• If STATED RATE < EFFECTIVE RATE OF INTEREST
→ Discounted amount / Present value < Face value of the note = Discount on Notes payable

• Some example of these notes may either be:

a.) Short term notes with stated rate more than market rate of interest
b.) Short term notes with stated rate is less than market rate of interest

* Long term notes with unrealistic interest rates are accounted for using the same principles applied to bonds payable that are issued at a
discount or at a premium.
 ILLUSTRATIVE PROBLEM:
S H O RT T E R M N OT E S W I T H S TAT E D R AT E M O R E
T H A N M A R K E T R AT E O F I N T E R E S T

On June 30, 2019, ACT Company issued a 1 year, P 4,500,000, 10% promissory note for the purchase of an equipment.
There is no equivalent cash price for this equipment, but the market rate of interest on similar notes is 8%.

Because the stated rate is significantly different from market rate of interest, the note and interest to be paid shall be discounted
using the market rate of interest which is shown below:

Present value of the face value

Principal - P 4,500,000
Stated Interest ( 4,500,000 x 10% ) 450,000 P4,500,000 x .9259… 4,166,666.67
Total future cash outflow 4,950,000 Present value of the interest
PV factor at 8% for one period 0.9259… P4,500,000 x 10% x .9259… 416,666.67
Present Value of the note 4,583,333.33
Present value of the note 4,583,333.33

The stated rate (10%) is higher than the market rate of interest (8%), with this it will result to a present value
(4,583,333.33) which will be higher than the face amount of the note (4,500,000). Because the present value is
higher than the face amount of the note, a premium on notes payable (83,333.33) is going to be recognized.
 ENTRIES IN THE BOOKS OF At the end of each reporting period, the amount of notes
ACT COMPANY : payable as well as the interest accrued that is due within one
year shall be classified as current liabilities.
2019
June 30 Equipment P 4,583,333.33 Thus, in the statement of financial position at Dec 31 of 2019
Notes payable P 4,500,000 and 2020, the notes payable and interest payable shall be
Premium on notes payable 83,333.33
classified as:

Dec. 31 Interest Expense* 183,333.33

Premium on notes payable 41,666.67
Interest payable 225,000 2019 2020
*4,583,333.33 x 8% x 6/12

2020 Current Liabilities:

June Notes Payable 4,500,000 0
30 Interest Expense 183,333.33 Premium on notes payable 41,666.67 0
Premium on notes payable 41,666.67 Interest payable 225,000 0
Interest payable 225,000 Non-current Liabilities:
Notes Payable 4,500,000 Notes Payable
Cash 4,950,000 0 0
 ILLUSTRATIVE PROBLEM:
S H O RT T E R M N OT E S W I T H S TAT E D R AT E L E S S
T H A N M A R K E T R AT E O F I N T E R E S T

On June 30, 2019, ACT Company issued a 1 year, P 4,500,000, 10% promissory note for the purchase of an equipment.
There is no equivalent cash price for this equipment, but the market rate of interest on similar notes is 12%.

Because the stated rate is significantly different from market rate of interest, the note and interest to be paid shall be discounted
using the market rate of interest which is shown below:
Present value of the face value
Principal - P 4,500,000 P4,500,000 x .8928… 4,017,857.14
Stated Interest ( 4,500,000 x 10% ) 450,000 Present value of the interest
Total future cash outflow 4,950,000
PV factor at 12% for one period 0.8928… P4,500,000 x 10% x .8928… 401,785.71
Present Value of the note 4,419,642.86 Present value of the note 4,419,642.86

The stated rate (10%) is less than the market rate of interest (12%), with this it will result to a present value (
4,419,642.86) which will be less than the face amount of the note (4,500,000). Because the present value is less
than the face amount of the note, a discount on notes payable (80,357.14) is going to be recognized.
 ENTRIES IN THE BOOKS OF At the end of each reporting period, the amount of notes
ACT COMPANY : payable as well as the interest accrued that is due within one
year shall be classified as current liabilities.
2019
June 30 Equipment P 4,419,642.86 Thus, in the statement of financial position at Dec 31 of 2019
Discount on notes payable 80,357.14 and 2020, the notes payable and interest payable shall be
Notes payable P 4,500,000
classified as:

Dec. 31 Interest Expense* 265,178.57

Discount on notes payable 40,178.57
Interest payable 225,000 2019 2020
*4,419,642.86 x 12% x 6/12

2020 Current Liabilities:

June Notes Payable 4,500,000 0
30 Interest Expense 265,178.57 Discount on notes payable (40,178.57) 0
Interest payable 225,000 Interest payable 225,000 0
Notes Payable 4,500,000 Non-current Liabilities:
Discount on notes payable 40,178.57 Notes Payable
Cash 4,950,000 0 0
 NON-INTEREST BEARING NOTES

• Is a note that does not explicitly state an interest rate on the face of the note. It is a form of a note where
interest is already imputed on the face value of the note.
• FACE VALUE = PRESENT VALUE + IMPUTED INTEREST
• TRANSACTION PRICE = CASH RECEIVED or FAIR VALUE OF GOODS AND SERVICES RECEIVED
• If the note is issued in exchange of goods and services whose fair value cannot be reliably determined, the
present value of the note is computed base on the prevailing market rate of interest for a similar obligations and
is recognized initially as a liability.
• The difference between the face value of the non-interest bearing note and the present value computed is
recognized as Discount on Notes payable. The Discount on Notes payable represents the total interest expense
to be recognized over the term of then note.
• Using the effective interest method, interest is recognized over the term of the note with a debit to Interest
Expense and a credit to Discount on Notes payable adjusting the amortized cost of the notes.
• The Discount on notes payable balance every reporting date is deducted to the face value of the note to arrive
at the amortized cost presented in the statement of financial position.
 ILLUSTRATIVE PROBLEM:
S H O RT T E R M N O N - I N T E R E S T B E A R I N G N OT E

On April 1, 2019, ACT Company issued a 1-year, non-interest bearing note for P 4,500,000 for the purchase of an
equipment. There is no equivalent cash price for this equipment, but the market rate of interest on similar obligations
at that time is 8%. The company’s reporting date is every December 31.

Because there is no know cash price equivalent or fair value of equipment, the asset and the liability is initially recognized at the
present value of the note discounted at the prevailing market rate of interest for similar obligations which is computed as
follows:

Face value of the note - P 4,500,000

PV factor at 8% for one period 0.9259…
Present value of note 4,166,666.67

The Discount on notes payable balance is computed as:

Face value of the note 4,500,000

Present value of the note . 4,166,666.67
Discount on notes payable 333,333.33
 ENTRIES IN THE BOOKS OF At the end of each reporting period, the amount of notes
ACT COMPANY : payable as well as the interest accrued that is due within one
year shall be classified as current liabilities.
2019
April 1 Equipment P 4,166,666.67 Thus, in the statement of financial position at Dec 31 of 2019
Discount on notes payable 333,333.33 and 2020, the notes payable and interest payable shall be
Notes payable P 4,500,000
classified as:

Dec. 31 Interest Expense* 250,000

Discount on notes payable 250,000
*4,166,666.67 x 8% x 9/12 2019 2020

2020 Current Liabilities:

April 1 Interest Expense* 83,333.33 Notes Payable 4,500,000 0
Discount on notes payable (83,333.33) 0
Discount on notes payable 83,333.33
Carrying amount 4,416,666.67
*4,166,666.67 x 8% x 3/12
Non-current Liabilities:
Notes payable 4,500,000 Notes Payable
0 0
Cash 4,500,000
 ILLUSTRATIVE PROBLEM:
L O N G T E R M N O N - I N T E R E S T B E A R I N G N OT E –
M AT U R I T Y VA L U E I S PAYA B L E I N L U M P S U M

On April 1, 2019, ACT Company issued a 3-year, non-interest bearing note for P 4,500,000 for the purchase of an
equipment. There is no equivalent cash price for this equipment, but the market rate of interest on similar obligations
at that time is 8%. The company’s reporting date is every December 31.

Because there is no know cash price equivalent or fair value of equipment, the asset and the liability is initially recognized at the
present value of the note discounted at the prevailing market rate of interest for similar obligations which is computed as
follows:

Face value of the note - P 4,500,000

PV factor at 8% for one period 0.7938…
Present value of note 3,572,245.08

The Discount on notes payable balance is computed as:

Face value of the note 4,500,000

Present value of the note 3,572,245.08
Discount on notes payable 927,754.92
 AMORTIZATION TABLE

Preparation of amortization table is needed to be used as a guide for the entries in the books of ACT Company.

Date Discount amortization Carrying value/ Amortized cost

April 1,2019 3,572,245.08
April 1,2020 285,779.61 3,858,024.69
April 1,2021 308,641.97 4,166,666.66
April 1,2022 333,333.33 4,500,000
 ENTRIES IN THE BOOKS OF
ACT COMPANY :

2019 2021
April 1 Equipment P 3,572,245.08 April 1 Interest Expense* 77,160.49
Discount on notes payable 927,754.92 Discount on notes payable 77,160.49
Notes payable P 4,500,000 *3,858,024.69 x 8% x 3/12

Dec. 31 Interest Expense* 214,334.71 Dec. 31 Interest Expense* 250,000

Discount on notes payable 214,334.71 Discount on notes payable 250,000
*3,572.245.08 x 8% x 9/12 * 4,166,666.67 x 8% x 9/12

2020 2022
April 1 Interest Expense* April 1 Interest Expense*
71,444.90 83,333.33
Discount on notes payable 71,444.90 Discount on notes payable 83,333.33
*3,572.245.08 x 8% x 3/12 * 4,166,666.67 x 8% x 3/12

Dec. 31 Interest Expense* 231,481.481 Notes payable 4,500,000

Discount on notes payable 231,481.481 Cash 4,500,000
* 3,858,024.69 x 8% x 9/12
At the end of each reporting period, the amount of notes payable as well as the interest accrued that is due within
one year shall be classified as current liabilities.

Thus, in the statement of financial position at Dec 31 of 2019 and 2020, the notes payable and interest payable shall
be classified as:

2019 2020 2021 2022

Current Liabilities:
Notes Payable 0 0 4,500,000 0
Discount on notes payable 0 0 (83,333.33) 0
Carrying amount 4,416,666.67
Non-current Liabilities:
Notes Payable 4,500,000 4,500,000
Discount on notes payable ( 713,420.21) (410,493.83) 0 0
Carrying amount 3,786,579.79 4,089,506.17
 ILLUSTRATIVE PROBLEM:
L O N G T E R M N O N - I N T E R E S T B E A R I N G N OT E –
M AT U R I T Y VA L U E I S PAYA B L E I N I N S TA L L M E N T

On April 1, 2019, ACT Company issued a 3-year, non-interest bearing note for P 4,500,000 for the purchase of an
equipment. The note is payable in equal annual installments every April 1, starting April 1,2020. There is no equivalent
cash price for this equipment, but the market rate of interest on similar obligations at that time is 8%. The company’s
reporting date is every December 31.

Because there is no know cash price equivalent or fair value of equipment, the asset and the liability is initially recognized at the
present value of the note discounted at the prevailing market rate of interest for similar obligations which is computed as
follows:

Annual principal payment - P 1,500,000

PV factor for ordinary annuity at 8% for 3 periods 2.5771…
Present value of note 3,865,645.48

The Discount on notes payable balance is computed as:

Face value of the note 4,500,000

Present value of the note 3,865,645.48
Discount on notes payable 634,354.52
 AMORTIZATION TABLE

Preparation of amortization table is needed to be used as a guide for the entries in the books of ACT Company.

Periodic Applied to Carrying value/

Date payment Interest principal Amortized cost
April 1,2019 3,865,645.48
April 1,2020 1,500,000 309,251.64 1,190,748.36 2,674,897.12
April 1,2021 1,500,000 213,991.77 1,286,008.23 1,388,888.89
April 1,2022 1,500,000 111,111.11 1,388,888.89 0.00
 ENTRIES IN THE BOOKS OF
ACT COMPANY :
2019 2021
April 1 Equipment P 3,865,645.48 April 1 Interest Expense* 53,497.94
Discount on notes payable 634,354.52 Discount on notes payable 53,497.94
Notes payable P 4,500,000 *2,674,897.12 x 8% x 3/12

Notes payable 1,500,000

Dec. 31 Interest Expense* 231,938.73 Cash 1,500,000
Discount on notes payable 231,938.73
*3,865,645.48 x 8% x 9/12
Dec. 31 Interest Expense* 83,333.33
Discount on notes payable 83,333.33
2020 * 1,388,888.89 x 8% x 9/12
April 1 Interest Expense* 77,312.91
Discount on notes payable 77,312.91 2022
*3,865,645.48 x 8% x 3/12 April 1 Interest Expense*
27,777.78
Notes payable 1,500,000 Discount on notes payable 27,777.78
Cash 1,500,000 * 1,388,888.89 x 8% x 3/12

Dec. 31 Interest Expense* 160,493.83 Notes payable 1,500,000

Discount on notes payable 160,493.83 Cash 1,500,000
* 2,674,897.12 x 8% x 9/12
At the end of each reporting period, the amount of notes payable as well as the interest accrued that is due within
one year shall be classified as current liabilities.

Thus, in the statement of financial position at Dec 31 of 2019 and 2020, the notes payable and interest payable shall
be classified as:

2019 2020 2021 2022

Current Liabilities:
Notes Payable 1,500,000 1,500,000 1,500,000
Discount on notes payable ( 77,312.91) ( 53,497.94) (27,777.78) 0
Carrying amount 1,422,687.09 1,466,502.06 1,472,222.22

Non-current Liabilities:
Notes Payable 3,000,000 1,500,000
Discount on notes payable ( 325,102.88) (111,111.11) 0 0
Carrying amount 2,674,897.12 1,388,888.89