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Understanding Notes Payable Accounting

Chapter 8 discusses Notes Payable, defining a promissory note as a written unconditional promise to pay a specified sum of money. It outlines the initial and subsequent measurement of notes payable according to PFRS 9, including fair value considerations and amortized cost calculations. The chapter also addresses the treatment of notes issued for cash, property, and the implications of interest-bearing versus non-interest bearing notes.

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11 views6 pages

Understanding Notes Payable Accounting

Chapter 8 discusses Notes Payable, defining a promissory note as a written unconditional promise to pay a specified sum of money. It outlines the initial and subsequent measurement of notes payable according to PFRS 9, including fair value considerations and amortized cost calculations. The chapter also addresses the treatment of notes issued for cash, property, and the implications of interest-bearing versus non-interest bearing notes.

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misterzodiaczane
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© All Rights Reserved
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Chapter 8

Notes Payable
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 or determinable future time a sum
certain in money to order or to bearer
Obligation evidenced by a promissory note to pay a certain
sum of money to the bearer at a designated future time. The
promissory notes may arise out of either a trade situation
(purchase of goods or services on credit) or the borrowing of
money from a bank, or other transactions.
Initial measurement of Note Payable
PFRS 9, par 51.1., 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. Otherwise, if it is
irrevocable designated at FV through profit or loss, any
transaction cost expensed immediately.
The fair value of the note payable is equal to the present value
of the future cash payment to settle the note payable using the
market rate of interest.
Subsequent measurement
The amortized cost of the note payable is the amount at which the
note payable is measured initially:
a. Minus principal repayment
b. Plus or minus the cumulative amortization using the effective
interest method of any difference between the face amount and
present value of the note payable
Notes Bearing a Realistic Interest Rates
The accounting for the issuance of interest-bearing note is
relatively straightforward. An entity initially recognizes the note at
face value, which equals its fair value at the date of issuance,
under the presumption that the stated interest rate approximates
the prevailing market interest rate.
Treatment for the following note:
a. Note issued solely for cash
Cash proceeds is equal to the present value of the note

b. Interest Bearing note issued for property


Purchase price is equal to the present value of the note

c. Non-Interest Bearing Note for property


Cash Price is equal to the present value of the note
Cash price minus the face value of the note to the imputed interest on the
note

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