ACCOUNTING FOR LIABILITIES
LESSON: NOTES PAYABLE
What is a note?
A note is a negotiable instrument. It is an
unconditional promise in writing made by one person
to another, signed by the maker, engaging to pay on
demand (kung walang certain date), or at a fixed or
determinable future time, a sum certain in money to
order or to bearer.
Maker is the debtor. Point of view tayo ng debtor.
Ang promissory note ay pwedeng Interest-bearing or
Non-interest-bearing.
How to record the initial measurement?
Fair value minus transaction cost (this is the
measurement of any financial asset or financial
liability) (yung notes payable ay isang financial
liability)
*note that:
-transaction costs are expensed as incurred when
note payable measures at FVTPL.
-present value is equal to the present value of future
cash flows using market rate of interest. (applicable
ang paggamit ng present value kapag ang ating
notes payable ay non-interest bearing)
QUESTION: Paano mo masasabi na ang isang note
payable ay interest-bearing or non-interest bearing if
hindi sinabi sa problem?
Yung tinutukoy nating interest ay nagrerefer sa “rate”,
at para masabi mong interest-bearing ang isang
notes payable, dapat may makikita kang nominal or
stated or contract rate.
Pero kapag ang nakikita mo lang ay market rate or
the yield rate, meaning, ang notes payable ay
non-interest bearing.
How about the subsequent measurement?
Ang general rule is to record at amortized
cost for both notes and bonds payable.
*So, the 1st step is to determine if the notes payable is
interest-bearing. Kapag may nominal rate, automatic,
interest-bearing na ito. Kasi, sa notes payable, di ang
market rate ang tinitignan natin. Ang treatment sa
notes payable ay nominal rate is equal to the market
rate of interest. Halos walang problems wherein
makikita mong magkaiba ang nominal and market
rate, either one of the two lang ang given. Madalas
mo lang makikita na present ang dalawang ito sa
bonds payable, because very relevant ang market
rate sa bonds payable in determining whether we are
going to issue the bonds at discount or premium.
Paano nga ba yung nangyari? Like, what’s the
concept?
Kasi sa promissory note, nag “promise” ka, w/c means
dapat mo talagang mabayaran yung inutang mo.
Okay, another measurement:
Amortized cost of note payable - initial
measurement:
>Less principal repayment (kapag installment)
>Add or less cumulative amortization using the
effective interest method of either discount or
premium on note payable.
ACCOUNTING PROCEDURES
Different scenarios for note payable:
>Note issued solely for cash
>Interest-bearing note issued for property
>Non-interest-bearing note issue for property (CPE
known)
>Non-interest-bearing note issue for property (CPE
unknown)
>Non-interest-bearing note payable lump sum (ito
ung may included na installment and down payment
or down payment lang)
1) Note issued solely for cash
Initial measurement = cash proceeds
(kung magkano ang ating cash proceeds, yun na rin
ang magiging initial measurement)
Example:
Queen Company borrowed P8M cash on
Nov. 1, 2020 to fund its project. The loan was
granted by Landbank under a short term credit
line. The company issued a 9-month, 12% note with
interest payable at maturity. The fiscal year is the
same as the calendar year. Prepare necessary
entries related to the note.
Answers:
*Issuance of note
Cash
8M
Note Payable
*Accrual of Interest
Interest Expense
160k
Interest Payable
*Payment at Maturity
Interest Expense
560k
8M
160k
Interest Payable
Notes Payable
Cash
160k
8M
8.72M
Since interest-bearing ang note (mapa-short or
long-term), hindi mo na kailangang kunin ang present
value, that is why it is 8M sa issuance of note. (the
face value)
*Eh paano naman kung non-interest? Its either yung
duration is less than 12 months or more than (w/c
means current or long-term)
Kapag short-term, and ginawa ang pagpapautang
under a normal business transaction, kahit
non-interest bearing, hindi na iprepresent value. Pero
if not under a normal business transaction, whether
short-term or long-term, always get the present
value.
QUESTION: Pwede bang makareceive ng lower sa face
amount? (if non-interest bearing)
Yes, if lower ang nareceive, yung proceeds mo ay ang
initial measurement mo. That time, hindi pa magiging
balance ang balance sheet mo unless ilalagay mo na
yung difference nila as a discount. (discount on notes
payable)
Btw, Principal and Face Amount are two synonymous
terms.
Next, sa accrual of interest naman, we accrue at Dec
31.
So 2 months *from Nov to Dec.
Prt = 8M x 12% x (2/12) = 160,000
Then, yung sa payment at maturity, the journal entry
above is made with no reversing entry, which means,
this was made at 2021. (after the 9-month said
duration)
Paano nacompute yung 560k interest expense?
Prt lang ulit. 8M x 12% x (7/12) = 560k. Dati you accrued
2 months and your full duration is 9 months so there
are 7 months remaining.
Paano naman if may reversing entry? Isisingit mo
lang yung reversal nung accrued interest.
On January 1 reversing entry:
Interest Payable
160k
Interest Expense
160k
Then, the payment at maturity will be:
Interest Expense
720k
Notes Payable
8M
Cash
8.72M
*720k is 8M x 12% x (9/12)
So, how much the interest expense at 2021 will be even
with reversing entry? Still 560k kasi naoffset yun Jan1.
(bcos u close int exp @ year end dahil temporary
account ito)
2) Interest-bearing note issued for property
Initial measurement = face amount
Example:
At the beginning of the year 2021, an entity
acquired equipment for P2M payable in four
annual equal payments every Dec 31 every year.
Interest is 8% on the unpaid balance. Prepare
journal entries related to the note for 2021 and
2022.
Will it affect ba the measurement of the note if it is an
installment payment? Wala. (via installment man or
one-time payment, same pa rin ang measurement so
huwag agad-agad magcompute ng present value.
Tignan muna if interest-bearing) (inaapply mo lang
yung cash price equivalent kapag ang note is
non-interest bearing.)
Answers:
2021
Equipment
2M
Notes Payable
Interest Expense
160k
Note Payable
500k
Cash
2M
660k
2022
Interest Expense
Note Payable
Cash
120k
500k
620k
How much is the current portion of the long-term
payable at Dec. 31, 2021? 2022?
Notes payable as of 12/31/2021 = 1.5M
*2M-500k=1.5M
Paano malalaman kung magkano ang current?
-Kapag interest bearing, kung magkano ang annual
payment, that is the current portion. Dito, 2M/4 edi
yung 500k ang current portion mo. The rest is
noncurrent = 1M
3) Noninterest bearing note issued for property (CPE
known)
Initial measurement = Cash price equivalent minus
down payment (if any)
*Take note that we are referring to the balance of
notes payable, hindi yung initial measurement ng
PPE.
noncurrent portion as of Dec 31, 2020 and the cv this
year.
450k - 325k = 125k *the current portion
Example:
At the beginning of the year 2020, a
company acquired equipment with a cash price of
P750,000 for P1,000,00. The company paid P200,000
ang signed noninterest bearing note for the
balance which is payable in 4 equal payments
every Dec 31 of each year. Prepare journal entries
for 2020.
*this problem is installment
Down payment = 200k
*Acquisition
Equipment
750k
Discount on NP
250k
Cash
200k
NP
800k
*yung discount can be the balancing figure, but to
get it without the journal entry, deduct the down
payment of 750k from the 200k cash cash payment to
get 550k w/c is the carrying amount and the initial
measurement of the notes payable, at ang face
amount ng notes payable ay 800k, then, 800k - 550k =
250k
NP
200k
Cash
4) Non-interest bearing note issued for property (CPE
unknown)
Initial measurement = present value
*kapag unknown ang cash price equivalent, we will be
using the present value pero imaminus mo pa rin ang
down payment if there is any.
Example:
At the beginning of the year 2020, LITT
Company acquired equipment for P1,500,000
payable for 5 equal annual payments every
December 31. The prevailing interest rate for this
type of asset is 10%. The present value of an
ordinary annuity of 1 for 5 years using 10% is 3.7908.
Prepare a table for amortization and the journal
entries related to the note for 2020 and 2021
Date
200k
Periodic
Payment
*880k/4 annual equal payments = 200k
Interest Exp
100k
Discount on NP
100k
*In terms of amortizing discount, we have 3 methods,
straight line, outstanding balance, or effective
interest. The most appropriate here is outstanding
balance method because it is installment.
The carrying amounts would be
800K
(8/20)*250k
= 100k
600k
(6/20)*250k
= 75k
400k
(4/20)*250k
= 50k
200k
(2/20)*250k
= 25k
—---—----2M
250k
*yung 20 is 2M, shortcut lang.
Carrying amount = 550k - 200k + 100k = 450k
*yung amortization of the discount mag-iincrease
ang carrying amount
To determine the cv as of Dec 31, 2020, get first the cv
of Dec 31, 2021 = 450k-200k+75k = 325k *this is the
Interest
Expense
(10%)
Principal
Reduction
01/01/2020
Carrying
Amount
1,137,240
12/31/2020
300,000
113,724
186,276
950,964
12/31/2021
300,000
95,096.40
204,903.60
746,060.40
12/31/2022
300,000
74,606.04
225,393.96
520,666.44
12/31/2023
300,000
52,066.64
247,933.36
272,733.08
12/31/2024
300,000
27,273.31
272,726.69
6.39 (0 or
sometimes
almost 0, the
excess is due
to rounding off)
Maeencounter mo sa notes ang decreasing kapag
may installment.
Journal Entries
2020
1/1
Equipment
1,137,240
Discount on NP
362,760
Notes Payable
1,500,000
12/31
Notes Payable
300,000
Cash
300,000
Interest Expense
113,724
Discount on NP
113,724
QUESTION: How much is the current and non-current
portion of the note payable on Dec. 31, 2020?
Current = 204,904
Non-current = 746,060
*Assuming you don’t have a table, how to compute it
with a shortcut?
(1,137,240 x 1.1) - 300k = 950,964 CV of note as of 12/31/20
(950,964 x 1.1) - 300k = 746,060 Noncurrent portion of
the note as of 12/31/20
So the current portion will be = 950,964 - 746,060 =
204,904
Ang pinagkaiba sa process ng notes and bonds
payable is minaminus mo sa bonds yung interest
payments, not the periodic payments.
5) Non-interest bearing note payable lump sum
Initial measurement - Present value
Example:
At the beginning of the year 2020. Raprap
Company acquired land for P5.25M. The entity paid
P1.25M down and signed a non-interest bearing
note for the balance which is due 3 years from now.
There was no established exchange price for the
land and the note had no ready market. The
market rate of interest for this type of note was 12%.
The PV of 1 at 12% for 3 periods is 0.7118. Prepare
journal entries for 2020 and 2023.
*hindi ito installment since it is payable 3 years from
now.
Journal Entries
Land
Disc on NP
Cash
NP
4,097,200 *pv1 ito plus dp
1,152,800
1,250,000
4,000,000
Interest Exp
341,664 *pv1 times 12%
Disc on NP
341,664
NP
Cash
4,000,000 *journal entry for 1 time payment
4,000,000
To get the interest expense ng 2023,
Pv1 na 2,847,200 x 1.12^(3years).