Let’s Check
The fair value option of recording note payable, amortizes discount at every end of
the year. (True or False)
2. The cost of asset acquired upon the issuance of a noninterest bearing note is equal
to the cash equivalent price, if readily available. (True or False)
3. The cost of the asset acquired by an issuance of a noninterest bearing note does
not include the down payment made on the date of transaction. (True or False)
4. The difference between the cash equivalent price of 540,000 for an equipment
acquired at 600,000 noninterest bearing note is a loss on acquisition of the asset.
(True or False)
5. When a company’s own note is discounted at the bank, the difference between the
face value of the note and the cash proceeds from the bank is amortized as interest
expense over the period of the note. (True or False)
6. When an entity issued a note solely in exchange for cash, the present value of the
note at issuance is equal to its face value. (True or False)
7. If the present value of a note issued in exchanged for a property is less than the
face amount, the difference should be included in the cost of the asset. (True or
False)
8. Discount on note payable may be debited when an entity discounts its own note with
the bank. (True or False)
9. The discount on note payable is a deduction from the face amount of note payable.
(True or False)
10. The discount on note payable represents interest charges applicable to past
periods. (True or False)
11. Amortizing the discount on note payable gradually decreases the carrying amount of
the liability over the life of the note. (True or False)
12. The discount resulting from the determination of the present value of a note payable
should be reported as
a. Deferred credit
b. Direct deduction from the face amount of the note
c. Deferred charge
d. Addition to the face of the note
13. When a note payable is exchanged for property, the stated interest rate is presumed
to be fair when
a. No interest rate is stated
b. The stated interest rate is unreasonable
c. The face amount of the note is materially different from the cash sale price for
similar property
d. The stated interest rate is equal to the market rate
14. On October 1, 2019, an entity borrowed cash and signed a three year interest
bearing note on which both principal and interest are payable on Oct. 1,2022. On
Dec. 31, 2021 accrued interest payable should
a. Be reported as current liability
b. Be reported as noncurrent liability
c. Be reported as part of noncurrent note payable
d. Not be reported as liability
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1.
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Let’s Analyze
Answer the following adapted problems:
1. Assume that on January 1, 2011, an entity acquired an equipment with a cash price of
400,000 for 550,000, 150,000 down and the balance payable in 4 equal annual
instalments. What is the amount to be debited as cost of the Equipment?
Answer: The cost of the asset is the cash equivalent price of 400,000
2. On January 1, 2019, Mabelle Company acquired a tract of land for 10,500,000. The
entity paid a 2,500,000 down payment and signed a non interest bearing note for the
balance which is due on January 1, 2022.
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There was no established exchange price for the land and the note had no ready
market. The prevailing interest rate for this type of note was 12%. The present value of
1 at 12% for 3 periods is .7118.
Q1
What is the cost of the land?
DP
=
2500,000
PV of N/P
= .7118(8000,000)
5,694,400
8,194,400
Q2
What is the initial carrying amount of the notes payable?
Note payable
8,000,000
Discount on N/P
2,305,600
CA
5,694,400
Q3
What is the amount of interest expense for the year 2019?
Interest Expense 2019
5,694,400(.12)=
683,328
Q4
What is the carrying amount of the notes payable on Dec. 31, 2019?
Note payable
8,000,000
Discount on N/P
(1,622,272)
(2,305,600-683,328)
CA 12/31/2019
6,377,728
On March 2, 2018, Firefly company borrowed 800,000 and signed a 2-year note
bearing interest at 12% per annum compounded annually. Interest is payable in full at
maturity on Feb. 28,2020.
Q1
What is the amount of interest expense for Dec. 2018?
800,000*.12*10/12=80,000
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3.
Q2
What is the amount of interest expense for Dec. 2019?
880,000*.12=105,600
In a Nutshell
Answer the following adapted problems:
Problem 1.
On January 1, 2019,Joanna Company borrowed 1,000,000 8% noninterest bearing note
due in four years. The present value of the note on the date of issuance was 367,500. The entity elected
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irrevocable the fair value option in measuring the note payable. On December 31, 2019, the fair value of
the note is 408,150.
Q1
What is the carrying amount of the note payable on December 31, 2019?
At FV 408,150
Q2
What amount should be reported as interest expense for 2019?
1,000,000 (.08) =
Q3
80,000
What amount of gain from change in fair value of the note payable should be reported for 2019?
367,500-408,150=40,650
Answer is Zero because its not gain.
Loss from change in FV 40,650
Q4
Zero
40,650
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N/P
At what amount should the discount on note payable be presented on December 31, 2019?
Problem 2On January 1, 2011 an entity acquired an equipment for 2,000,000 payable in 5
equal annual instalments on every December 31, of each year. The prevailing market interest
rate is 10%. The table of present value shows that the present value factor of an annuity of 1
for 5 years at 10% is 3.7908. Prepare the entries for 2011 and 2012 and show the necessary
solutions.
Answer:
1/1/2011
Equipment
1,516,320
Discount on N/P
483,680
Note payable
2,000,000
= 3.7908 (400,000)=1,516,320
12/31/2011
Notes payable 400,000
Cash
400,000
Interest expense ( 1,516,320*.10)
Discount on N/P
Notes payable 400,000
Cash
400,000
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12/31/2012
Interest expense 1,267,952*.10
Discount on note payable
400,000
400,000
151,632
151,632
151,632
126,795
248368
273,205
126,952
126,795
1516320
1,267,952
994,747
Problem 3On January 1, 2011, an entity acquired an equipment for 3,000,000. The entity paid
300,000 down and signed a noninterest bearing note for the balance which is due after three
years on January 1, 2014. The prevailing interest rate is 10%. The present value of 1 for 3
periods is .7513.
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Required 1
1/1/2011
Prepare the entries for 2011 and 2012.
Equipment
2,328,510
Discount on N/P
671,490
Cash
300,000
Note payable 2,700,000
.7513(2,700,000)=2,028,510 + 300,000=2,328,510
2,700,000-2,028,510 = 671,490
Interest expense
202,851
Discount on N/P
202,851
12/31/2012
Interest Expense
223,136
Discount on N/P
223,136
Required 2
Prepare the amortization table.
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12/31/2011
202,851
223,136
245,503
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12/31/2011
12/31/2012
12/31/2013
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2,028,510
2,231,361
2454,497
2,700,000