CHAPTER
8
NOTES PAYABLE
1
NOTES 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 a sum certain in
money to order or to bearer.
Notes payable
2
INITIAL MEASUREMENT OF NOTE PAYABLE
PFRS 9, paragraph 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.
Notes payable
3
SUBSEQUENT MEASUREMENT OF NOTE PAYABLE
PFRS 9, paragraph 5.3.1, provides that after initial
recognition, a note payable shall be measured:
A. At amortized cost using the effective interest method.
B. At fair value through profit or loss if the note payable is
designated irrevocably as measured at fair value through
profit or loss.
Notes payable
NOTE ISSUED SOLELY FOR CASH 5
When a note is issued solely for cash,
the present value is equal to the cash proceeds.
Illustration
Notes payable
On November 1, 2020, an entity discounted its own note of P1,000,000
at 12% for one year.
Note Payable 1,000,000
Less: Discount(12% x 1,000,000) 120,000
Net proceeds 880,000
Notes payable 5
7
When a property or noncash asset is
Interest acquired by issuing a
promissory note which is interest
bearing bearing, the property or
asset is recorded at the purchase
note issued price.
The purchase price is reasonably
for propertyassumed to be the present
value of the note and therefore, the fair
value of the property
Notes payable
8
Illustration
On January 1, 2020, an entity acquired an equipment for
P1,000,000 payable in 5 annual equal installments every
December 31 of each year. Interest is 10% on the unpaid
balance
Notes payable
Notes payable 9
NON- INTEREST BEARING NOTE 10
ISSUED FOR PROPERTY
When a non interest bearing note is issued for
Notes payable
property, the property is recorded at the cash price
of the property.
The cash price is assumed to be the present value
of the not issued.
11
Notes payable
Table of 12
amortization
Year Note payable Fractions Amortization
2020 400,000 4/10 60,000
2021 300,000 3/10 45,000
2022 200,000 2/10 30,000
2023 100,000 1/10 15,000
1,000,000 150,000
Notes payable
Another illustration - no cash price 13
• On January 1, 2020, an entity acquired an equipment for P1,000,000
payable in 5 equal annual installments on every December 31 of each year.
• Observe that there is no agreed interest and no cash price is available for
the equipment.
• In such a case, the cost of the equipment is equal to the present value of
the P200,000 annual installments in 5 years at an appropriate rate of 10%.
• The rate of 10% is assumed to be the prevailing market rate of interest.
• The present value of an ordinary annuity of 1 for 5 years at 10% is 3.7908.
• Therefore, the present value of five P200,000 installments is P758,160,
computed by multiplying P200,000 by the present value factor of 3.7908.
Table of 15
amortization
Date Payment Interest Principal Present value
Jan. 1, 2020 758,160
Dec. 31, 2020 200,000 75,816 124,184 633,976
Dec. 31, 2021 200,000 63,398 136,602 497,374
Dec. 31, 2022 200,000 49,737 150,263 347,111
Dec. 31, 2023 200,000 34,711 166,289 181,822
Dec. 31, 2024 200,000 18,178 181,822 -
Notes payable
14
Notes payable
NON- INTEREST BEARING NOTE 17
PAYABLE LUMP SUM
On January 1, 2020, an entity acquire an equipment for
Notes payable
P1,000,000. The entity paid P100,000 down and signed a
non interest bearing note for the balance which is due after
three years on January 1, 2023.
There was no established cash price for the equipment. The
prevailing interest rate for this type of note is 10%. The
present value of 1 for 3 periods is .7513.
Computation 18
Downpayment 100,000
Present value of note (P900,000 x .7513) 676,170
Cost of equipment 776,170
Imputed interest
Face value of note 900,000
Present value of note 676,170
Imputed interest 223,830
19
Table of 20
amortization Discount on
Date Interest expense note payable Present value
1/1/ 2020 223,830 676,170
12 /31/2020 67,617 156,213 743,787
12/ 31/2021 74,379 81,834 818,166
12/31/2022 81,834 - 900,000
Notes payable
21
FAIR VALUE OPTION OF MEASURING NOTE PAYABLE
PFRS 9, paragraph 4.2.2, provides that at initial recognition,
a note payable may be irrevocably designated as at
fair
value through profit or loss.
Notes payable
Illustration
23
• On January 1, 2020, an entity borrowed from a bank P4,000,000 on
a 12% 5-year interest bearing note.
• The entity received P4,000,000 which is the fair value of the note on
January 1, 2020. Transaction cost of P100,000 was paid by the
entity.
• The fair value of the note payable was P3,500,000 on December 31,
2020.
• The entity has elected irrevocably the fair value option for measuring
the note payable.
• The change in fair value comprised P50,000 attributable to credit risk
and P450,000 attributable to interest risk.
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