URDANETA CITY
UNIVERSITY
Owned and operated by the City Government of
Urdaneta
Intermediate Accounting 2
Learning Materials
Notes Payable
PROBLEM 6: FOR CLASSROOM DISCUSSION
Problem 1
Non-Interest Bearing Note – Lump-sum
On January 1, 20x1, an entity issues a non-interest bearing note payable of P1,600,000 in
exchange for land. The note is due on December 31, 20x3. The effective interest rate is
17%.
Requirement:
Provide all the entries during the term of the note payable.
Solution:
Cash flows
PV of 1 @17%, n=3
Present value - 1/1/x1
Date
1,600,000
0.62437
998,992
Interest expense
Discount on N/P
1/1/x1
Present value
601,008
998,992
12/31/x1
169,829
431,179
1,168,821
12/31/x2
198,700
232,479
1,367,521
12/31/x3
232,479
0
1,600,000
1/1/x1
Land
Discount on notes payable
Notes payable
998,992
601,008
12/31/x1
Interest expense
Discount on notes payable
169,829
1,600,000
169,829
12/31/x2
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URDANETA CITY
UNIVERSITY
Owned and operated by the City Government of
Urdaneta
Interest expense
Discount on notes payable
12/31/x3
Interest expense
Discount on notes payable
Notes payable
Cash
198,700
198,700
232,479
232,479
1,600,000
1,600,000
Problem 2
Non-Interest Bearing Note – Installments
On January 1, 20x1, an entity issues a non-interest bearing note of P1,200,000 in
exchange for land. The note is due in three equal annual installments every December 31.
The effective interest rate is 17%.
Requirement:
a. Provide all the entries during the term of the note.
b. Compute for the current and non-current portions of the note on December 31,
20x1 and the amount of “Discount on Notes Payable” allocated to each portion.
Solution:
Requirement (a):
Cash flows
400,000
PV ord. annuity @17%, n=3
2.209585
Present value - 1/1/x1
883,834
Date
Payments
Interest expense
Amortization
1/1/x1
Present value
883,834
12/31/x1
400,000
150,252
249,748
634,086
12/31/x2
400,000
107,795
292,205
341,881
12/31/x3
400,000
58,119*
341,881
0
* Squeezed to eliminate difference due to rounding-off
1/1/x1
Land
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883,834
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URDANETA CITY
UNIVERSITY
Owned and operated by the City Government of
Urdaneta
Discount on notes payable
Notes payable
316,166
1,200,000
12/31/x1
Notes payable
400,000
Interest expense
150,252
Discount on notes payable
Cash
150,252
400,000
12/31/x2
Notes payable
400,000
Interest expense
107,795
Discount on notes payable
Cash
107,795
400,000
12/31/x3
Notes payable
400,000
Interest expense
58,119
Discount on notes payable
Cash
58,119
400,000
Requirement (b):
Current portion:
₱ 400,000
Notes payable (400,000 due in 20x2)
Discount on notes payable (400K – 292,205 current portion)
Notes payable, net (presented in current liabilities)
(107,795)
292,205
Noncurrent portion:
Notes payable (400,000 due in 20x3)
400,000
Discount on notes payable (400K – 341,881 noncurrent portion)
(58,119)
Notes payable - net (presented in noncurrent liabilities)
341,881
₱ 634,086
Total notes payable, net - Dec. 31, 20x1
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URDANETA CITY
UNIVERSITY
Owned and operated by the City Government of
Urdaneta
Problem 3
Non-Interest Bearing Note – Installment in Advance
On January 1, 20x1, Otters Co. issued a 3-year non-interest bearing note of P1,200,000 in
exchange for equipment. The note is due in three equal annual installments beginning on
January 1 thereafter. The effective interest rate is 10%.
Requirement:
a. Prepare the amortization table.
b. How much is the interest expense in 20x1?
c. How much is the carrying amount of the note on December 31, 20x1?
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):
Date
Payments
Interest expense
Amortization
1/1/x1
Present value
1,094,215
1/1/x1
400,000
-
400,000
694,215
1/1/x2
400,000
69,422
330,578
363,637
1/1/x3
400,000
36,363
363,637
(0)
Requirement (b):
69,422 – see table above.
Requirement (c):
Carrying amt. on 1/1/x2
363,637
Add back: Payment on 1/1/x2
400,000
Carrying amt. on 12/31/x1
763,637
Problem 4
Loan Payable – Origination Fee
On January 1, 20x1, Jaco Co. obtains a P3,000,000 bank loan which is maturing on
December 31, 20x3. The loan requires payment of 10% interest annually every December
31. The bank charges Jaco Co. a 4.8037% nonrefundable loan origination fee.
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URDANETA CITY
UNIVERSITY
Owned and operated by the City Government of
Urdaneta
Requirements:
Compute for the following:
a. Carrying amount of the loan on January 1, 20x1
b. Effective interest rate on the loan
c. Carrying amount of the loan on December 31, 20x1
Solutions:
Requirement (a):
Loan payable
Transaction costs (3M x 4.8037%)
Carrying amount - 1/1/x1
3,000,000
(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):
Date
Payments
Interest expense
Amortization
Present value
2,855,889
1/1/x1
12/31/x1
300,000
342,707
42,707
2,898,596
12/31/x2
300,000
347,832
47,832
2,946,428
12/31/x3
300,000
353,572
53,572
3,000,000
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URDANETA CITY
UNIVERSITY
Owned and operated by the City Government of
Urdaneta
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(075) 600 - 1507
San Vicente West, Urdaneta City, Pangasinan
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