CHAPTER 24
NOTES
PAYABLE
SOURCES: Millan and Valix
MEMBERS:
KRISHA .ALCANTARA
KYLE ANGEL AMANDO
PRECIOUS FIONA DOSDOS
SHANDARA CRETZ CASTRO
JOVELYN MAMUSOG
LEARNING COMPETENCIES
State the initial and subsequent
measurement of notes and loans payable.
Apply present value factors properly.
Prepare amortization tables.
Explain the accounting for origination fees
on loans payable.
WHAT IS
NOTES
PAYABLE?
Notes payable are obligations supported by debtor promissory
notes.
The accounting for notes payable is similar to the accounting
for notes receivable.
Initial measurement of financial
liabilities
Financial liabilities are initially recognized at fair
value minus transaction costs that are directly
attributable to the issuance, except for financial
liabilities at FVPL whose transaction costs are
expensed immediately.
Fair value is the price that would be received to
sell an asset or paid to transfer a liability in an
orderly transaction between market participants
at the measurement date.
Transaction costs are incremental costs that are
directly attributable to the issue of a financial
liability. An incremental cost is one that would not
have been incurred if the entity had not issued the
financial instrument.
Short-term notes payable are initially measured
either at face amount or present value.
Initial measurement of financial
liabilities
Long-term notes payable with reasonable
interest rate are initially recognized at face
amount.
Long-term noninterest-bearing notes payable
and Long-term notes payable with unreasonable
interest rate are initially measured at present
value.
If the cash price equivalent of the noncash
consideration received in exchange for the note is
available, the note payable is initially measured at
this amount.
Subsequent Measurement
Notes Payable that are initially measured at face
amount are subsequent measured at face amount
or expected settlement amount.
Notes Payable that are initially measured at
present value are subsequently measured at
amortized cost.
Amortized cost as the “amount at which the
financial asset or financial liability is measured at
initial recognition minus principal payments plus
or minus the cumulative amortization using the
effective interest method of any difference
between that initial amount and the maturity
amount and for financial assets adjusted for any
loss allowance.” (PFRS 9, APPENDIX A)
STATED INTEREST RATE VS.
EFFECTIVE INTEREST RATE
Stated interest rate Effective interest rate
Stated interest rate (nominal rate, Effective interest rate (imputed rate
coupon rate, or face rate) is the rate of interest, current market rate or
appearing on the face of an interest- yield rate) is the rate used in present
bearing note. value computations.
LOANS PAYABLE
Origination fees are deducted from the
carrying amount of the loan and
subsequently amortized using the effective
interest method.
Origination fees are included in the
calculation of the effective interest rate
over the expected term of the loan payable,
meaning, on transaction date, the
origination fees are treated as adjustment
to the effective interest rate.
Note Issued Solely for Cash
When the nore payable is issued solely for cash,
the present value is equal to the cash proceeds.
For example:
On November 1, 2024, an entity discounted its
own note of ₱1,000,000 at 12% for one year.
Note Payable ₱1,000,000
Discount(12% x 1,000,000 ( 120,000)
Net Proceeds. 880.000
Journal Entry:
Cash 880,000
Discount on note payable 120,000
Note Payable 1,000,000
The straight line method is used in amortizing the
discount on note payable for simplicity. Besides, the
note payable
Non-interest Bearing
A non-interest-bearing note has an unspecified principal and an unspecified
interest. These elements are separated through present value computations.
Future value flows x PV factor at x% = Present value.
PV of P1 is used when the future cash flow is in lump sum.
PV of an ordinary annuity of P1 is used when the future cash flows are in
installments and the first installment does not begin immediately.
PV of an annuity due of P1 is used when the future cash flows are in installments
and the first installment begins immediately.
Total interest expense recognized over the the life of a noninterest- bearing note is
equal to the discount on note payable on initial recognition.
Interest payable = Face amount x Nominal rate.
Interest expense= Present value x effective interest rate.
ILLUSTRATION:
On January 1, 20x1, ABC Co. acquired a piece of equipment in exchange for
P100,000 cash and a noninterest-bearing note of P1,000,000 due on January 1,
20x4. The prevailing rate of interest for this type of note is 12%.
INTEREST
BEARING NOTE
ISSUED FOR
PROPERTY
When a property or noncash asset is acquired by issuing a
promissory note which is interest-bearing, the property or
asset is recorded at the purchase price, which is reasonably
assumed to be the present value of the note and therefore, the
fair value of the property.
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
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
PFRS 9, paragraph 5.7.7
provides that the gain or loss on financial liability
designated at fair value through profit or loss shall
be recognized either in other comprehensive
income or profit or loss.
Fair value option of measuring note payable
a. The change in fair value attributable to the credit
risk is recognized in other comprehensive income.
Credit risk is the risk that the issuer of the
liability would cause a financial loss to the other
party by failing to discharge the obligation.
Credit risk does not include market risk such as
interest risk, currency risk and price risk.
b. The remaining amount of the change in fair
value attributable to interest and market factors is
recognized in profit or loss or reported in the
income statement.
Fair value option of measuring note payable
Application Guidance B5.7.9 provides that amount
recognized in other comprehensive income resulting
from chenge in fair value attributable to credit risk
shall not be subsequently transferred to profit or
loss.
However, the cumulative gain or loss recognized in
other comprehensive income is subsquintly
transferred directly to retained earnings.
Under the fair value option, any transaction cost is
recognized as outright expense.
There is no amortization of discount and premium
on note payable.
As a matter of fact, interest expense is recognized using
the nominal or stated interest rate.
Fair value option of measuring note payable
ILLUSTRATION:
On January 1, 2024, 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, 2024. Transaction cost of P100,000 was
paid by the entity. The fair value of the note
payable was P3,500,000 on December 31,
2024. The entity has elected irrevocably the
fair value option for measuring the note
The gain from change in fair value is reported in
payable. The change in fair value comprised the income statement.
P50,000 attributable to credit risk and
P450,000 attributable to interest risk. The gain from credit risk is reported in the statement
of comprehensive income as component of other
comprehensive income.