Chapter 2 - Accounts Payable and Notes Payable

CHAPTER 2
ACCOUNTS PAYABLE AND NOTES PAYABLE
Chapter Overview and Objectives

After this chapter, readers are expected to comprehend:

1. The transactions affecting the accounts payable and the computation of the
accounts payable ending balance.
2. The adjustments to the reported accounts payable balance.
3. The different types of notes payable.
4. The accounting procedures for each different type of notes payable.

ACCOUNTS PAYABLE - INTRODUCTION

Accounts payable is the most common and usually the first type of liability that the
readers may have encountered. This normally arises from the credit purchases of
inventory, equipment, supplies, and other assets from suppliers.

Accounts payable is considered as a short-term financing wherein the entity shall

pay the supplier within a specified period of time, usually ranging from 30 days to -
60 days. To promote prompt payments, the supplier may also include a prompt
payment discount if the account is paid much earlier during the credit period. This
is known as a “purchase discount” in the perspective of the purchasing entity.

Accounting procedures for purchase discount have already been discussed in the
Volume 1 of this Intermediate Accounting series.

ACCOUNTING FOR ACCOUNTS PAYABLE (A/P)

As a financial liability, the accounting for accounts payable is relatively
straightforward. The first thing that the readers should know is what are the
transactions affecting this account and what are the effects of these transactions.
The following transactions affect the accounts payable balance, including the pro-
forma journal entries:

Transactions Effect in A/P Pro-Forma Journal Entries

. Purchases XX
Credit purchases made Increase Accoiiiits payable =a
Payments to suppliers Decrease equal to
beyond the discount the amount of cash Accounts payable ex
; Cash XX
period payment
ss Decrease equal to
Payments to supplier S | theamounteateash Accounts payable XX
within the discount payment plus Cash XX
_. period purchase discount Purchase discount XX

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 Chapter 2 —- Accounts Payable and Notes Payable

Transactions Effect in A/P Pro-Forma Journal Entries

Purchase returns or
ee ee Hanksabe Accounts payable XX
ChCGE PUPCHESES Purchase return or allow. xx
(receipt of credit memo
from the supplier)
Issuance of promissory Accounts payable oo
notes for overdue Decrease Nawenavails we
accounts payable apa
The readers should take note of the following:
a. Cash purchases do not affect the balance of accounts payable.
b. Cash refunds received as a result of purchase returns and allowances do not
affect the balance of accounts payable. To prove this point, the pro-forma journal
entry recording the refunds received is presented as follows:
Cash XX
Purchase returns and allowances XX

Accounts payable account is nowhere to be found in the above entry.

These transactions can be summarized in the following t-account:

Accounts Payable
Payments to credit purchases XX XX Beginning balance
Purchase discount XX XX Gross credit purchases
Purchase return or allowances XX
from unpaid credit purchases
Issuance of promissory note for XX
overdue accounts payable
Ending balance (squeeze) XX
Totals (should be equal) XX =

Transactions on the credit side increase the balance of accounts payable while the
those on the debit side decrease the balance of accounts payable.
The ending balance of accounts payable is the balancing figure between the initially
higher amount of total credits and initially lower amount of total debits to make
these totals equal in amount.
Illustration 1 - Simple. CARPIO Company had a beginning balance of P700,000 in
its accounts payable account. During the year, cash purchases and credit purchases
amounted to P300,000 and P2,800,000, respectively. Credit memos received from
suppliers amounted to P150,000 while cash refunds received amounted to
P100,000. Payments to credit suppliers totaled P2,400,000 which is already net of
P80,000 purchase discounts. Required: Determine the ending balance of accounts
payable.
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 Chapter 2 —- Accounts Payable and Notes Payable

The ending balance of the accounts payable is computed as follows:

Accounts Payable
Payments to credit purchases | 2,400,000 | 700,000 | Beginning balance
Purchase discount 80,000 | 2,800,000 | Gross credit purchases |
Purchase return or allowances 150,000
from unpaid credit purchases ital
Ending balance (P3.5M- | 870,000
P2.4M - P80K - P150K) i
Totals (should be equal) | 3,500,000 | 3,500,000 ot |

The readers should take note that the cash purchases and cash refunds received were
not included in the computations as neither of them affects the accounts payable
balance.
Illustration 2 - Comprehensive. On January 1, 2023, CARREON Company had
accounts payable balance of P1,800,000. During 2023, the following transactions
were also provided in aggregate basis:
a. Cash purchases amounted P800,000 which represented 20% of all the
Company’s purchases.
b. Payments to suppliers beyond the credit terms amounted to P2,000,000 while
payments to suppliers within the credit terms amounted to P1,358,000. Credit
terms for all of the suppliers is 3/15, n/45.
c. Credit memos received amounted to P200,000 while refunds received
amounted to P180,000.
d. Due to cash flow issues, the Company issued a note payable for P250,000 of its
overdue accounts payable.
Required: From the given information, determine the balance of accounts payable
as of December 31, 2023.

Solution:
The first step in solving this kind of problem is to determine the amounts relevant
in the computations that were not explicitly provided: ,
a. Credit purchases amounted to P3,200,000 computed based on cash purchases
[(P800,000/20%) x 80%]. Since cash purchases represent 20%, credit purchases
impliedly represent 80% of all purchases.
b. Purchase discounts amounted to P42,000 /(P1,358,000/(1 - 3%)) x 3%,
computed based on grossing up the cash payments to suppliers within the credit
terms then multiplying the grossed-up amount with the cash discount rate. The
1 . S$ )

c. Total payments of credit purchases, both within and beyond the discount period,
amounted to P3,358,000 (P2,000,000 + P1,358,000).
Next, compute for the ending amount of accounts payable using the t-account:
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 Chapter 2 —- Accounts Payable and Notes Payable

Accounts Payable
___Payments
to credit purchases | 3,358,000 | 1,800,000 | Beginning balance
Purchase discount | __42,000 | 3,200,000 | Gross credit purchases
Purchase return or allowances 200,000
from unpaid credit purchases . a a el
Issuance of promissory note 250,000
for overdue accounts payable
Ending balance (P5M - | 1,150,000
‘P3,358K - P42K - P200K - P250K)
Totals (should be equal) | 5,000,000 | 5,000,000

ADJUSTMENTS TO ACCOUNTS PAYABLE BALANCE

After determining the ending balance of accounts payable, other items might result
to adjustments, which primarily arise from the following:
a. Unreleased, stale, and postdated checks prepared by the entity.
b. Premature or late recording of suppliers’ invoices.

UNRELEASED, STALE AND POSTDATED CHECKS

Unreleased checks are checks made but not yet given to the payees as of the
reporting date. Stale checks are checks made but not yet encashed by payees within
180 days after the date indicated in the check. Postdated checks are those dated
beyond the reporting date.
The readers should take note that in this Chapter, the concepts on checks are told
in the perspective of the maker.

As mentioned in Volume 1 of this Intermediate Accounting series, once an entity

prepares a check as a payment of its accounts payable, there is a presumption
that the amount has already been deducted from the cash in bank and
accounts payable balances. This is particularly true even if the check is unreleased
or post-dated or becomes stale. The effects of these checks are seen in the following
pro-forma entry to record the payment of the accounts payable:
Accounts payable XX
Cash in bank XX

Because of this, the amount of unreleased, stale, and postdated checks that were
already recorded shall be added back to the accounts payable balance by making
the following journal entry:
Cash in bank XX
Accounts payable XX

Illustration 3. As of December 31, 2023, BALTAZAR Company reported ending

balance of P1,500,000 in accounts payable. Also, as of the same date, the Company
had the following information about the checks it prepared:
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 Chapter 2 —- Accounts Payable and Notes Payable

a. Acheck amounting to P120,000 was released only on January 5, 2024.

b. A check amounting to P80,000, dated December 20, 2023, was made last
December 1, 2023.
c. Acheck amounting to P60,000, dated January 6, 2024, was made last December
15, 2023.
Required: Determine the adjusted accounts payable as of December 31, 2023.

Solution:
The adjusted balance of accounts payable is computed as follows:
Particulars Amounts Remarks
Unadjusted P1,500,000
Check A 120,000 Unreleased check as of 12/31/23
Check B - Notpostdated as of 12/31/23
Check C 60,000 Postdated as of 12/31/23
Adjusted P1,680,000

PREMATURE OR LATE RECORDING OF INVOICES FROM SUPPLIERS

Based on the current setup of the accounting information systems of many entities,
increase in the accounts payable will be recorded only upon the receipt of
invoice from supplier of goods and services. As a result, in the absence of contrary
information, the receipt of supplier invoice is presumed to be recorded as an
increase in the accounts payable balance.

Pro-forma journal entry to record the receipt of supplier invoice is as follows:

Purchases or other expense account XX
Accounts payable XX

It should be highlighted that we are talking about accounts payable account

and not the inventory account.

There will be some time lags between the incurrence of liability (i.e, the transfer of
legal title) and the actual receipt of invoice (i.e., the recording of liability). The timing
of transfer of the legal title will still depend on the shipping terms, primarily
FOB shipping point and FOB destination. Again, the rules on the timing of transfer
of legal title based on shipping terms are presented as follows:
a. FOB shipping point - on the date of the supplier's shipment of goods
b. FOB destination - on the date of the entity's receipt of goods

Generally, these time lags are very short and do not really affect the entity’s
reported amounts for a particular reporting period.
For example, the legal title over purchased inventories was transferred to the entity
on November 5, 2023. However, the related invoice was received and recorded only

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 Chapter 2 - Accounts Payable and Notes Payable

on November 10, 2023. In this case, even though there is a delay of a few days, the
whole year ending December 31, 2023 will have no accounting issues since both of
the events were recorded during the same accounting period.

However, as of the reporting date, the amounts reported for accounts payable shall
properly reflect the actual amounts of incurred liability as of that date (i.e., cut-off).
Accounting issues will arise from the following examples of scenarios of in-transit
inventories as of December 31, 2023:
Invoice Date Date of
Receivedand Shippedby Receipt of
Scenario Shipping terms Recorded Supplier Inventory
1 FOB shipping point 1/2/24 12/27/28 1/3/24
Z FOB destination 12/30/23 12/29/23 1/4/24
The following corrections shall be made on the above scenarios:
a. For scenario 1, accounts payable shall be recorded as early as December 27,
2023, which is the date the ownership was transferred to the entity when the
goods were shipped (ie., FOB shipping point terms). As a result, accounts
payable as of December 31, 2023 shall be increased.
b. For scenario 2, accounts payable was prematurely recorded on December 30,
2023 upon the receipt of the invoice. However, it shall be recorded only on
January 4, 2024 when the legal title was transferred to the entity upon actual
receipt of the goods (i.e., FOB destination terms). As a result, accounts payable
as of December 31, 2023 shall be decreased.
Let us know answer a more comprehensive problem.
Illustration 4. PABLO Company reported an unadjusted amount of accounts
payable of P2,260,000 as of December 31, 2023. In addition, the following
additional information was also provided:
Invoice Date Date of
Suppliers’ Shipping Receivedand Shippedby Receiptof
Invoice terms (FOB) Amount Recorded Supplier Inventory
1 shipping point P70,000 1/4/24 12/30/23 1/6/24
2 destination 130,000 1/3/24 12/29/23 1/4/24
3 shipping point 170,000 12/28/23 12/27/23 1/5/24
4 destination 90,000 12/30/23 12/28/23 1/2/24
Required: From the provided information, determine adjusted amount of accounts
payable.
Solution:
The adjusted accounts payable balance is determined by applying the rules on the
timing of transfer of legal title based on shipping terms:

B,

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 Chapter 2 — Accounts Payable and Notes Payable

Particulars Amounts Remarks

Unadjusted P2,260,000
Invoice 1 70,000
Should be recorded as early as 12/30/23 when the legal”
title was transferred upon shipment. sini’
Properly recorded during 2024 (1/3/24), during the period
Invoice 2 - when the legal title was transferred to the Company upon
actual receipt on 1/4/24 a
Properly recorded during 2023 (12/28/23), during the
Invoice 3 - period when the legal title was transferred to the Company
upon shipment on 12/27/23 cele
Should be recorded only during 2024, during the period
Invoice 4 (90,000) when the legal title was transferred to the Company upon
actual receipt on 1/2/24
Adjusted — P2,240,000
NOTES PAYABLE - INTRODUCTION
This liability arises from a promissory note, as previously described in Volume 1 of
this Intermediate Accounting series. The classification of a note as a receivable or
payable will depend on whose perspective we are looking at:
a. On the perspective of the payee, it is a note receivable
b. On the perspective of the maker, it is a note payable
To reiterate, the maker is the one who creates and signs the promissory note and
obliges itself to pay a specified amount of money at specified date/s in the future.
On the other hand, the payee is to whom the amount stated in the promissory note
is given. This amount may or may not include interest.
For the rest of the chapter, the focus is on the maker's perspective. The maker’s note
payable arises from the issuance of promissory notes for any of the following
purposes:
a. Purchasing of goods on account beyond normal credit terms
b. Acquiring high-cost long-term assets
c. Borrowing of funds
d. Paying damages
Notes payable can either be payable lump-sum on maturity date (i.e, a term notes
payable) or in installments (i.e., a serial notes payable).

NOTES PAYABLE - INITIAL RECOGNITION AND MEASUREMENT

Since note payable is considered as a financial liability, it shall be initially
measured at fair value asof initial recognition less transaction costs incurred.
Similar to notes receivable, the note payable’s fair value depends on the following:
a. whether the note is interest-bearing or not; and
b. if the note is interest-bearing, whether the stated rate is substantially equal to
market rates.

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 Chapter 2 — Accounts Payable and Notes Payable

Similar to notes receivable, the following decision diagram may be of help to the
readers in determining the note’s fair value on initial recognition:

Is the note interest-bearing?

Yes

Stated Rate = Market Rate?

Yes v

Fair value = present value of cash

Fair value is equal to note’s face
flows using market rate as of
amount
initial recognition

Stated rate means the amount of interest that the maker shall pay in addition to
the face amount of the promissory note. Market rate is the general prevailing rate
of return that the investors expect from the investments with similar characteristics
as the promissory note, regardless of whether the note is interest-bearing or not.

As to the present value calculations, the relevant present value factor will depend
on the timing and amount of the cash flows of notes payable. The computations of
these factors were lengthily discussed in the Notes Receivable chapter in the
Volume 1 of this Intermediate Accounting series:

PV factor of Single PV factor of Ordinary PV factor of

Payment Annuity Annuity Due
Generally, for term notes | Generally, for serial | Generally, for serial
payable. Can be used for | installment notes payable | installment notes payable
some serial notes where | to be received in equal | to be received in equal
the installment | installment amounts in | installment amounts in
payments are unequal | equal interval at the end | equal interval at the
and/or intervals are | of each period. beginning of each
unequal. period.
Cash flow amount is equal
Cash flow amountisequal | to periodic installment | Cash flow amountis equal
to face amount amount to periodic installment
amount

Illustration 5. LOZADA Company issued the following notes payable during the
year 2023, all for the purchase of merchandise inventory:

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 Chapter 2 — Accounts Payable and Notes Payable

Note Faceamount Statedrate Marketrate Term

1 P2,000,000 10% 10% 4 years
2 5,000,000 None 6% 4 years
3 4,000,000 None 7% 2 year's
4 3,000,000 5% 8% 3 years

Principal amounts for Notes 1, 2 and 4 are all payable on the relevant maturity dates
while Note 3 is payable in two equal annual installments.
Required: Determine the initial fair value of each note and entries to record them
on initial recognition.

Answer - Note 1
Since the note is interest-bearing and the related stated rate is equal to market rate,
the note’s fair value is P2,000,000. The entry to record the transaction is as follows;
Purchases 2,000,000
Notes payable 2,000,000
There is a debit to Purchases account since all of the notes are issued for the
purchase of inventory.
Answer - Note 2
Since the note is noninterest-bearing, its fair value is computed as the present value
of cash flows using the 6% market rate as the discount rate for 4 periods.
PV Cash Flow
PV Factor of Factor onMaturity§ Fair Value
Single payment for 4 periods at6% 0.792094 — P5,000,000 P3,960,470

PV of single payment was used since the note is payable in lump-sum on its
maturity. The entry to record the transaction is as follows:
Purchases 3,960,470
Discount on notes payable 1,039,530
Notes payable 5,000,000
The readers should take note of the following:
a. Even though the fair value of the note is P3,960,470, the Notes Payable
account is credited equal to its face amount.
b. The amount debited to Discount on notes payable account is equal to the
difference between the note’s face amount and its initial fair value.

Answer - Note 3
The note is noninterest-bearing, so its fair value is computed as the present value
of cash flows using the 7% market rate as the discount rate. However, unlike the

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 Chapter 2 - Accounts Payable and Notes Payable

Note 2, PV of ordinary annuity will be used since the note is payable in two equal
annual installments.
PV Annual
PV Factor of Factor PrincipalPmts. Fair Value
Ordinary annuity for 2 periodsat7% 1.808018 P2,000,000 P3,616,036

The amount of annual principal payment is computed as P4,000,000/2 years.

The entry to record the transaction is as follows:

Purchases 3,616,036
Discount on notes payable 383,964
Notes payable 4,000,000
Answer - Note 4
Even though this note is interest-bearing, its stated rate (5%) is not substantially
equal to the prevailing market rate (8%). As a result, its fair value is computed as
the present value of principal, as well as the interest payments. In this case, PV
factor of single payment will be used for the amount of principal and PV factor
of ordinary annuity will be used for annual interest payment of P150,000
(P3,000,000 x 5%).
PV
PV Factor of Factor Cash Flows Fair Value
Single payment for 3 periods at 8% 0.793832 P3,000,000 P2,381,496
Ordinary annuity for 3 periods at8% 2.577097 150,000 386,565
Total Fair Value P2,768,061

The readers should take note that this is very similar to the computation of the
initial fair value of investment in debt securities.
The entry to record the transaction is as follows:
Purchases 2,768,061
Discount on notes payable 231,939
Notes payable 3,000,000

SUBSEQUENT ACCOUNTING FOR PROMISSORY NOTES

Since the initial recognition is different depending on whether the notes payable is
interest-bearing or noninterest-bearing, subsequent accounting will, consequently,
be different depending on the notes payable:

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 Chapter 2 - Accounts Payable and Notes Payable

Interest-Bearing | Interest-Bearing a
Stated Rate = Stated Rate + Noninterest-
Market Rate Market Rate Bearing
Based on market rate on initial
Based on stated recognition (i.e., the effective interest
Interest expense rate applied to rate) applied to beginning-of-the-
face amount period carrying amount
*Carrying amount Based oe The present value amounts appearing
each reporting date nenvainiie jars in the amortization able
amount
Recognition of ‘
accrued interest Based on stated rate Not applicable
payable (no stated rate)
*Generally, the amount of note’s fair value as of the end of each reporting date is not
considered, except when the note payable is measured at fair value through profit or loss. This
subsequent measurement is to be discussed later in the chapter.

Interest-Bearing Note with Stated Rate = Market Rate, Payable Lump-Sum

Illustration 6, On January 1, 2023, GUZMAN Company issued an 8% interest-
bearing promissory note with face amount of P5,000,000 and term of three years.
The note was issued on account of the Company’s purchase ofa land. On the same
date, market yields averaged 8%. Required: Determine the journal entries to be
recorded for 2023 and 2024 in relation to the notes.
The note’s fair value on January 1, 2023 is equal to its face amount. On the same
date, the entry to record the issuance of promissory note is as follows:
Land 5,000,000
Notes payable 5,000,000

Recording of interest will result to the following journal entry, to be made both on
December 31, 2023 and 2024:
Interest expense (P5M x 8%) 400,000
Cash 400,000

Interest-Bearing Note with Stated Rate = Market Rate, Payable in Installments

Illustration 7. CAMACHO Company acquired a building on January 1, 2023 fora
total price of P15,000,000. The Company immediately paid P5,000,000 down
payment and issued a 10% interest-bearing promissory note for the balance. This
note is payable in equal installments of P2,500,000 starting from December 31,
2023 until December 31, 2026. Market rates averaged 10% on the issuance date.
Required: Determine the journal entries to be made during 2023 and 2024.
The note’s fair value on January 1, 2023 is equal to its face amount. On the same
date, the entry to record the issuance of promissory note is as follows:
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 Chapter 2 - Accounts Payable and Notes Payable

Building 15,000,000
Notes payable 10,000,000
Cash ‘ 5,000,000
Since the principal is payable in installment basis (i.e., the note payable has
decreasing balance), the amount of interest expense to be paid each year is also
decreasing, as indicated in the following computations:
Beg. Interest Expense Dec. 31 Bal.
Year Balance (Beg. Bal.x10%) (Beg. Bal. - P2.5M)
2023 P10,000,000 P1,000,000 P7,500,000
2024 7,500,000 750,000 5,000,000
2025 5,000,000 500,000 2,500,000
2026 2,500,000 250,000 =i
Again, the basis of interest expense is the beginning-of-the-period balance of the
principal. The journal entries to record the payment of interest and installment
payment of principal on December 31, 2023 are the following:
Interest expense 1,000,000
Cash 1,000,000
Note payable 2,500,000
Cash 2,500,000

The journal entries to record the payment of interest and installment payment of
principal on December 31, 2024 are the following:
Interest expense 750,000
Cash 750,000

Note payable 2,500,000

Cash 2,500,000

Noninterest-Bearing Note Payable Lump-Sum

Illustration 8. At the beginning of 2023, GUERRERO Company acquired an
equipment by issuing a noninterest-bearing promissory note with face amount of
P3,000,000. The note is payable after three years, on December 31, 2025. On the
date of issuance, market rates averaged 9%. Required: Determine the journal
entries to be recorded for 2023 and 2024.

The note’s fair value as of January 1, 2023 is computed and recorded as follows:
PV Factor of PVFactor CashFlow Fair Value
Single payment for 3 periods at 9% 0.772183 P3,000,000 P2,316,549

Equipment 2,316,549
Discount on notes payable 683,451
Notes payable 3,000,000
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 Chapter 2 — Accounts Payable and Notes Payable

Moving forward, the amounts of interest expense and carrying amount of the note
payable for each reporting date are determined from this amortization table:
Carrying Discount
Interest Amount/ on Notes
Date Expense Amort. PresentValue Payable
Jan. 1, 2023 2,316,549 683,451
Dec. 31,2023 208,489 208,489 2,925,038 474,962
Dec. 31,2024 227,253 227,253 2,752,291 247,709
Dec. 31,2025 247,709 247,709 3,000,000 -

The readers should take note of the following:

a. Initial amount of Discount on notes payable account will be the total amount
of interest expense to be recognized over the term of the note payable. Try
totaling the amounts in the Interest Expense column.
b. Carrying amount = Remaining face amount less balance in discount on notes
payable account (e.g., P2,525,038 = P3,000,000 - P474,962). -

The following are the entries to recognize interest expense for 2023 and 2024,
respectively:
Interest expense (2023) 208,489
Discount on notes payable 208,489
Interest expense (2024) 227,253
Discount on notes payable 221,293

Noninterest-Bearing Note Payable in Installment

Illustration 9. On January 1, 2023, PADUA Company acquired a building by issuing
a noninterest-bearing P4,500,000 promissory note that will mature on December
31, 2025. The note is payable in equal annual installments of P1,500,000 starting
December 31, 2023 and every December 31, thereafter. On the same date, market
yield averaged 7%. Required: Determine the journal entries for 2023 and 2024.
The note’s fair value as of January 1, 2023 is computed and recorded as follows:
Annual
PV Factor of PV Factor Payment Fair Value
Ordinary annuity for 3 periodsat7% 2.624316 =P 1,500,000 P3,936,474
Building 3,936,474
Discount on notes payable 563,526
Notes payable 4,500,000

Moving forward, the amounts of interest expense and carrying amount of the note
payable for each year are determined from this amortization table:

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 Chapter 2 — Accounts Payable and Notes Payable

Prin. Carrying Discount

Pmts_ Interest Amount/ Face on Notes
Date ‘ Expense Amort. Present Value Amt. Payable
Jan. 1, 2023 3,936,474 45M 563,526
Dec. 31,2023 15M 275,553 (1,224,447) 2,712,027 3.0M 287,973
Dec. 31,2024 15M 189,842 (1,310,158) 1,401,869 1.5M 98,131
Dec. 31,2025 15M 98,131 (1,401,869) S = a
The journal entries to record the interest expense and partial payment of note,
respectively, on December 31, 2023, are the following:
Interest expense 275,553
Discount on notes payable 275,553
Notes payable 1,500,000
Cash 1,500,000
The journal entries to record the interest expense and partial payment of note,
respectively, on December 31, 2024, are the following:
Interest expense 189,842
Discount on notes payable 189,842

Notes payable 1,500,000

Cash 1,500,000

Interest-Bearing Note with Stated Rate + Market Rate

Illustration 10. SALCEDO Company acquired a transportation vehicle on January
1, 2023 by issuing a 4% interest-bearing promissory note with face amount of
P2,000,000. The principal is payable on December 31, 2026 while the interest is
payable every December 31 of each year. On the same date, market rates averaged
6%. Required: Determine the journal entries for the years 2023 and 2024.

The note’s fair value as of January 1, 2023 is computed using the PV of single
payment for the amount of principal and PV of ordinary annuity for the annual
interest of P80,000 (P2,000,000 x 4%):
PV Factor of PV Factor CashFlows _ Fair Value
Single payment for 4 periods at 6% 0.792094 P2,000,000 P1,584,188
Ordinary annuity for 4 periodsat6% 3.465106 80,000 277,208
Total Fair Value P1,861,396

Journal entry to record the issuance on January 1, 2023 is as follows:

Building 1,861,396
Discount on notes payable 138,604
Notes payable 2,000,000

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 Chapter 2 — Accounts Payable and Notes Payable

Moving forward, the amounts of interest expense and carrying amount of the note
payable for each year is determined from this amortization table:
Carrying Discount
Interest Interest Amount/ on Notes
Date Payments Expense Amort. Present Value Payable
Jan. 1, 2023 1,861,396 138,604
Dec. 31, 2023 80,000 111,684 31,684 1,893,080 106,920
Dec. 31, 2024 80,000 113,585 33,585 1,926,665 73,335
Dec. 31, 2025 80,000 115,600 35,600 1,962,265 37,/39
Dec. 31,2026 80,000 117,735 = 37,735 2,000,000 =

Unlike in noninterest-bearing notes, Discount on notes payable is not the sole

source of interest expense for this type of note payable since interest amounts of
P80,000 are also paid each year.

The entry to record the payment of interest and recognition of interest expense on
December 31, 2023 is as follows:
Interest expense 111,684
Discount on notes payable 31,684
Cash 80,000

The entry to record the payment of interest and recognition of interest expense on
December 31, 2024 is as follows:
Interest expense 113,585
Discount on notes payable 33,585
Cash 80,000

PROMISSORY NOTES ISSUED DURING THE YEAR

In the previous illustrations, the promissory notes were all issued on January 1 of
each indicated year. However, in real life, promissory notes may also be issued, for
example, on February 1, March 1, March 31 and so on.
These scenarios have the following accounting consequences:
a. Interest-bearing note payable - accrued interest payable shall be recorded every
December 31 of each year. The amount accrued is from the immediately
preceding interest payment date until the December 31 reporting date.
b. Notes payable subject to present value calculations - the carrying amounts
indicated in the amortization table are not automatically the carrying amount as
of each reporting date. Partial amortization of the discount shall be made, which
will also affect the amount of interest expense during each period.
Illustration 11 - Interest-Bearing. On April 1, 2023, MYLENE Company issued a
five-year, 10% interest-bearing promissory note with face amount of P6,000,000 as
payment for an acquired land. Interest is payable every March 31 of each year.
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 Chapter 2 —- Accounts Payable and Notes Payable

Required: Determine the journal entries for the years 2023 and 2024.

The entry to record the issuance of promissory note on January 1, 2023 is as

follows:
| Land 6,000,000
Notes payable 6,000,000

To record the accrual of interest on December 31, 2023 covering a period from April
1, 2023 to December 31, 2023 (i.e., 9 months):
Interest expense (P6Mx10%x9/12) 450,000
Accrued interest payable 450,000

To record the payment of interest on May 31, 2024:

Accrued interest payable 450,000
Interest expense (P6Mx 10%x3/12) 150,000
Cash 600,000

The readers should take note that the three months used in computing the interest
expense amount is from January 1, 2024 to March 31, 2024.

Fast forward to December 31, 2024, the following accrual of interest payable shall
be made (9 months from April 1, 2024 to December 31, 2024):
Interest expense (P6Mx 10%x9/12) 450,000
Accrued interest payable 450,000

Illustration 12 - Noninterest-Bearing Note. On October 1, 2023, LAMB Company

issued a four-year, noninterest-bearing note with face amount of P3,000,000 for the
purchase of a machinery. Market rates as of that date averaged 7%. Required:
Determine the journal entries to be made for the years 2023 and 2024.

The note’s fair value as of January 1, 2023 is computed and recorded as follows:
PV Factor of PVFactor CashFlow Fair Value
Single payment for 4 periods at 7% 0.762895 P3,000,000 P2,288,685

Machinery 2,288,685
Discount on notes payable 714,315
Notes payable 3,000,000
The relevant amortization table is as follows:

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 Chapter 2 — Accounts Payable and Notes Payable

Carrying Discount
Interest Amount/ on Notes
Date Expense Amort. PresentValue Payable
Oct. 1, 2023 2,288,685 711,315
Sept.30,2024 160,208 160,208 2,448,893 551,107
Sept. 30,2025 171,423 171,423 2,620,316 379,684
Sept. 30,2026 183,422 183,422 2,803,738 196,262
Sept.30,2027 196,262 196,262 3,000,000 -

The readers should take note that the dates in the amortization table are not as of
December 31 of each year. In addition, the P160,208 interest expense
corresponding to September 30, 2024 is really for the period from October 1, 2023
to September 30, 2024. On the other hand, P171,423 interest corresponding to
September 30, 2025 is from October 1, 2024 to September 20, 2025 and so on.

As such, the carrying amount of the note payable as of December 31, 2023 shall be
determined by recording partial amortization of the discount from October 1, 2023
to December 31, 2023 (i.e., 3 months) as follows:
Interest expense (P160,208 x 3/12) 40,052
Discount on notes payable 40,052

After this entry, the carrying amount of the note payable on December 31, 2023
shall be determined as follows:

Note payable - face amount P3,000,00

Less: Discount on note payable (P711,315-P40,052) __ (67 1,263)
Carrying amount, December 31, 2023 2,328,737

Fast forward to September 30, 2024, the amortization from January 1, 2024 to
September 30, 2024 (i.e., 9 months) shall be recorded as follows:
Interest expense (P160,208x 9/12) 120,156
Discount on notes payable 120,156

Fast forward yet again to December 31, 2024, the partial amortization from October /
1, 2024 to December 31, 2024 (i.e., 3 months) shall be recorded as follows:

Interest expense (P171,423 x 3/12) 42,856

Discount on notes payable 42,856

After this entry, the carrying amount of the note payable on December 31, 2024
shall be determined as follows:
Note payable - face amount P3,000,000
Less: Discount on note payable (P671,263 ~ P120,156 - P42,856) (508,251)
Carrying amount, December 31, 2024 2,491,749

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 Chapter 2 — Accounts Payable and Notes Payable

Lastly, total interest expense for the year 2024 is P163,012 (P120,156 + P42,856).
FINANCIAL LIABILITIES - FAIR VALUE THROUGH PROFIT OR LOSS
Despite the general requirement to subsequently measure a financial liability at
amortized cost, an entity has an option, on initial recognition, to irrevocably
designate a note payable at fair value through profit or loss (FVTPL), meeting
either of the following scenarios:
a. The designation eliminates or significantly reduce a measurement or recognition
inconsistency (“accounting mismatch”); or
b. A group of financial liabilities or financial assets and financial liabilities is
managed and its performance is evaluated on a fair value basis. [PFRS 9.4.41].

For example, there is an accounting mismatch if an entity issued a note, bond, or

loan payable to borrow funds and use the proceeds to acquire financial assets at
FVTPL. In this case, there is a mismatch because the asset financed by the
transaction is measured at FVTPL while the financing transaction is measured at
amortized cost. This mismatch will be eliminated if the related note, bond, or loan
payable is also measured at FVTPL.
The accounting consequences of this FVTPL measurement are the following:
a. The liability’s carrying amount shall now be equal to its fair value as of each
reporting date. The following rules are relevant:

Scenario. Consequence
Fair value > Carrying amount | Unrealized loss
Fair value < Carrying amount | Unrealized gain

These unrealized gains and losses are reported in profit or loss. The readers
should take note that these rules are reverse of the rules in the financial assets
at FVTPL.
b. Interest expense is based the liability’s face amount times the stated rate, if any.
c. Transaction costs on the issuance of the liability shall be expensed outright.
d. The readers should take note that this designation does not automatically make
the financial liability as held for trading.

Illustration 13. BUENO Company borrowed P6,000,000 funds by issuing a 7%

interest-bearing note payable with face amount of P6,000,000 on January 1, 2023.
The note has a maturity date of December 31, 2025 and was issued to acquire an
investment in equity securities at FVTPL. As such, the note is irrevocably designated
to be accounted for at FVTPL. Required: Determine the journal entries for 2023 and
2024 assuming the note has a fair value of P6,500,000 and P6,400,000 as of
December 31, 2023 and 2024, respectively.
To record the borrowing of funds on January 1, 2023:
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 Chapter 2 — Accounts Payable and Notes Payable

Cash 6,000,000
Notes payable 6,000,000

The entries to record the payment of interest and change in fair value on December
31, 2023 are the following:
Interest expense 420,000
Cash (P6M x 7%) 420,000
Unrealized loss (P6.5M - P6M) 500,000
Note payable 500,000
There is a loss since there is an increase in the note payable’s fair value.
The entries to record the payment of interest and change in fair value on December
31, 2024 are the following:
Interest expense 420,000
Cash (P6M x 7%) 420,000

Note payable (P6.4M - P6.5M) 100,000

Unrealized gain 100,000

There is a gain since there is a decrease in the note payable’s fair value.
EXCEPTIONS TO THE RECOGNITION IN PROFIT OR LOSS
Not all changes in the financial liability’s fair value are recognized in profit or loss.
Changes in the fair value from the changes in the entity’s own credit risk shall be
recognized as addition to or deduction from other comprehensive income.
According to PFRS 7, credit risk is the risk that one party to a financial instrument
will cause a financial loss for the other party by failing to discharge an obligation.

The reason for this exception is that recognizing these changes in profit or loss will
not provide useful information. This is because the changes in the financial liability’s
fair value due to the changes in the entity's own credit risk are not really realized,
unless the financial liability is held for trading.

Illustration 14. At the beginning of 2023, EMPIRE Company issued a 10% interest-
bearing financial liability with a face amount of P5,000,000. The Company
irrevocably designated to present the changes in the fair value in profit or loss. Fast
forward to December 31, 2023, this liability had a fair value of P5,500,000. This
increase in fair value has arisen from the following:
Market factors P350,000
Entity’s own credit risk 150,000

In this case, the change in the fair value of the financial liability shall be recorded on
December 31, 2023 as follows:
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 Chapter 2 — Accounts Payable and Notes Payable

Unrealized loss - P/L 350,000

Unrealized loss - OCI 150,000
Note payable (P5.5M - P5M) 500,000

DETERMINING THE CHANGES IN FAIR VALUE ARISING FROM CHANGES IN THE

ENTITY'S OWN CREDIT RISK
In practice, determining the amount of change in fair value due to changes in the
_ entity’s own credit risk involves complex computations. However, a simple
| approach will be discussed in the chapter to give the readers a high-level idea on
this computational exercise.

The following procedures are relevant in determining the changes in fair value from
changes in the entity’s own credit risk:
1. First, determine the fair value of financial liability as of the end of the period by
discounting the remaining cash flows using the market rate as of that date.
2. Determine the portion of the interest rate of return (i.e., stated rate) that is
instrument-specific using the following formula:

Instrument-specific portion of the rate of return = Total rate of return less

benchmark rate as of the date of issuance

Total rate of return is usually equal to the stated rate.

3. Next, determine the present value of remaining cash flows using a discount rate
equal to instrument-specific portion of the rate of return plus benchmark
rate as of the reporting date.

4. Finally, the difference between the present value amount computed in step 3 and
the fair value of the financial liability in step 1 is the amount of change in fair
value arising from the changes in the entity’s own credit risk.

Graphically, this can be shown as follows:

Carrying amount of the liability as of

the beginning of the period
The difference shall be
recognized in profit or loss
Present value using the instrument-
specific rate plus benchmark rate as
of end of the period (Step 3)
The difference shall be
recognized in OCI
Fair value of the liability as of the
end of the period (Step 1)

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 Chapter 2 - Accounts Payable and Notes Payable

Illustration 15. On January 1, 2023, HAZE Company issued a P4,000,000 financia

liability with interest rate of 9% (equal to market rates) and maturity date of
December 31, 2027. The liability is to be accounted for at fair value through profit
or loss. Fast forward to December 31, 2023, the market rates averaged 8%
Benchmark rates as of January 1, 2023 and December 31, 2023 were 6% and 5.50%,
respectively. Required: From the given information, determine the journal entry ty
record the change in the liability’s fair value as of December 31, 2023.
In answering this problem, the following procedures are relevant:
1, First, determine the fair value of the financial liability as of December 31, 2023
using the 8% market rate. Remaining cash flows are for the liability’s four-year
remaining term as of that date, using annual interest of P360,000 (P4M x 9%):
PV Factor of PVFactor CashFlows Fair Value
Single payment for 4 periods at 8% 0.735030 P4,000,000 P2,940,120
Ordinary annuity for 4 periods at8% 3.312127 360,000 1,192,366
Total Fair Value P4,132,486

Next, determine the instrument-specific portion of the rate of return as follows:

3% = 9% total rate of return less 6% benchmark rate as of January 1, 2023

Next, determine the present value of the remaining cash flows using 8.50% (3%
instrument-specific portion of the rate of return plus 5.50% benchmark rate as of
December 31, 2023):
PV Cash Present
PV Factor of Factor . Flows Value
Single payment for 4 periods at 8.50% 0.721574 4,000,000 P2,886,296
Ordinary annuity for 4 periods at 8.50% 3.275597 360,000 1,179,215
Total Present Value P4,065,511
4. The amounts to be recognized in profit or loss and other comprehensive income
are determined as follows:

Carrying amount of the liability as of

the beginning of the period - Phe difcronea cal He
P4,000,000 Ser
recognized in profit or loss:

Present value using the instrument- a ange 11-

specific rate plus benchmark rate as muee ee]
of end of the period (Step 3) - —
P4,065,511 The difference shall be
recognized in OCI:
Fair value of the liability as of the P66,975 = P4,132,486 —
end of the period (Step 1) - P4,065,511
P4,132,486

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 Chapter 2 - Accounts Payable and Notes Payable

Since there is an increase in the fair value of the financial liability as of December
31, 2023, the following journal entry shall be made:
Unrealized loss - P/L 65,511
Unrealized loss - OCI 66,975
Financial liability 132,486

CHAPTER SUMMARY
1. Accounts payable arise from the usual credit purchase of inventory items or services
from supplier.
2. The ending balance of the accounts payable is determined as follows:
Accounts Payable
Payments to credit purchases xX xX Beginning balance
Purchase discount XX XX Gross credit purchases
Purchase return or allowances XX
from unpaid credit purchases
Issuance of promissory note for XX
overdue accounts payable
Ending balance (squeeze) XX
Totals (should be equal) XX XX

3. Recorded unreleased checks, stale check and post-dated check made by the entity
shall be added to the reported balance of accounts payable.
4, Late or early recording supplier's invoice will also warrant adjustments to the
reported balance of accounts payable.
5. Notes payable are evidenced by a formal document known as promissory note.
Notes payable is told in the perspective of the note’s maker.
6. On initial recognition, notes payable are measured at their fair values, less
transaction costs. The fair value of the note will depend on its cash flows:
a. The fair value of interest-bearing note, with stated rate = market rate is equal to
its principal amount.
b. The fair value of noninterest-bearing note is equal to its cash flows using the
market rate on date of issue as the discount rate.
c. The fair value of interest-bearing note, with stated rate # market rate is equal to
its cash flows using the market rate on date of issue as the discount rate.
7. Interest expense from 6.a above is equal to the remaining principal amount times
the stated rate. Interest expense from 6.b and 6.c above is equal to the beginning
carrying amount times the market rate on initial recognition (i.e., the effective
interest rate).
8. On initial recognition, an entity may irrevocably designate a financial liability at
FVTPL.
9. Increase in the fair value of financial liability at FVTPL is recognized as unrealized
loss, while the decrease is recognized as unrealized gain, both in profit or loss.
[Link] an exception, changes in the fair value of financial liability at FVTPL due to the
changes in the entity’s own credit risk shall be recognized in OCI.

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 Chapter 2 - Accounts Payable and Notes Payable

CHAPTER 2: SELF-TEST EXERCISES

we

True or False
1. The balance of the accounts payable is affected by the amount of cash refunds
received from the suppliers.
2. Cash purchases do not affect the ending balance of accounts payable.
3. Outstanding checks possessed by the payee shall be added to the accounts payable
balance. ,
4, Unreleased checks shall be added to the accounts payable balance.
5. Notes payable are evidenced by a formal document called promissory note.
6. All notes payable are initially measured at their face amounts.
7. Ifthere is one-time payment of noninterest-bearing note on its maturity date, then
the present value factor of ordinary annuity shall be used in determining its initia]
fair value.
8. Interest expense from a note payable bearing interest with stated rate that is
substantially equal to market rates is based on the remaining face amount times the
stated rate.
9, The carrying amount of noninterest-bearing note payable is also equal to the
present value of the remaining cash flows discounted using the prevailing market
rate on the reporting date.
10. Changes in the fair value of financial liability accounted at FVTPL arising from the
changes in the entity's own credit risk shall be recognized in OCI.

Multiple Choice - Theories

1, The following transactions affect the balance of accounts payable, except
credit purchases
o>

receipt of credit memo from purchase returns

c, receipt of cash refunds from purchase allowance
d. none of the above
2. Apayment of accounts payable within the discount period shall decrease the balance
of accounts payable equal to
a. cash payment only
b. cash payment plus purchase discount
c. purchase discount only
d. none of the above since payment of accounts payable shall increase the balance
of the accounts payable
3, Allofthe following checks shall result to adjustments to the ending accounts payable
balance, except
a. outstanding checks
b. unreleased checks
c. stale checks
d. post-dated checks

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 Chapter 2 —- Accounts Payable and Notes Payable

4, Which of the following scenarios will result to adjustments to the ending accounts
payable balance as of December 31, 2023?
a. An invoice was received and recorded on December 30, 2023 for goods that
were purchased FOB shipping point and were shipped on December 25, 2023.
The goods were actually received on January 2, 2024.
An invoice was received and recorded on January 5, 2024 for goods that were
purchased FOB destination and were shipped on December 29, 2023. The goods
were actually received on January 3, 2024.
An invoice was received and recorded on December 29, 2023 for goods that
were purchased FOB shipping point and were shipped on January 2, 2024. The
goods were actually received on January 5, 2024.
An invoice was received and recorded on January 10, 2024 for goods that were
purchased FOB destination and were shipped on December 31, 2023. The goods
were actually received on January 4, 2024.

5. All of the following scenarios will result to adjustments to the ending balance of
accounts payable as of December 31, 2023, except
a. A check dated January 10, 2024 was recorded and given to the payee on
December 20, 2023.
b. An invoice was received and recorded on December 28, 2023 for goods that
were purchased FOB destination and were actually received on January 5, 2024.
An invoice was received and recorded on January 6, 2024 for goods that were
purchased FOB shipping point and were shipped on December 29, 2023. Goods
were actually received on January 7, 2024.
A check dated December 29, 2023 was recorded and given to the payee on
December 22, 2023.

6. On initial recognition, notes payable are measured at their fair values. Which of the
following does not properly describe the fair value of the corresponding note
payable?
a. The fair value of an interest-bearing note payable, in general, is equal to the total
amount of cash to be paid during the note’s term.
b. The fair value of an interest-bearing note payable, with stated rate that is not
substantially equal to market rates, is equal to the present value of cash flows
discounted using the market rate on initial recognition.
c. The fair value of a noninterest-bearing note payable, with one-time payment on
maturity date, is equal to the present value of cash flows discounted using the
market rate on initial recognition.
d. The fair value of a noninterest-bearing note payable, with equal periodic
payment of principal, is equal to the present value of cash flows discounted
using the market rate on initial recognition.

7. Which of the following correctly describe /s the amount of interest expense that shall
be recognized from note payable?

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 Chapter 2- Accounts Payable and Notes Payable

a. No interest expense shall be recognized for noninterest-bearing note payable

since there is no related stated rate.
b. Interest expense from interest-bearing note payable, with stated rate
substantially equal to market rate, is equal to beginning face amount multiplied
with stated rate.
c. Bothaandb.
d. Neitheranorb.

8. The following correctly indicates the carrying amount of each type of note payable,
except
a. Interest-bearing note payable with stated rate substantially equal to market rate
- carrying amount is equal to remaining face amount.
b. Interest-bearing note payable with stated rate not substantially equal to market
rate - carrying amount is equal to remaining face amount.
c. Noninterest-bearing note payable that is payable lump-sum on maturity date -
carrying amount is equal to present value of remaining cash flows discounted
using the effective interest rate.
d. Noninterest-bearing note payable that is payable in equal annual installments -
carrying amount is equal to present value of remaining cash flows discounted
using the effective interest rate.

9. Ifa financial liability is accounted for at FVTPL, which of the following accounting
procedures is not correct?
a. The carrying amount of the financial liability is equal to its fair value as of the
reporting date.
b. Increase in the fair value of the financial liability is generally recognized as
unrealized loss in profit or loss.
c. Interest expense is equal to the beginning-of-the-period market rate multiplied
to the liability’s beginning carrying amount.
d. None of the above.
[Link] of the following components of the changes in the fair value of the financial
liability shall be recognized in profit or loss, except
a. entity's own credit risk
b. changes in the benchmark rate
c. changes from market conditions
d. none of the above

Straight Problems ;
1. On January 1, 2023, CHERRY Company had a beginning accounts payable balance 0!
P900,000. During the year, the Company had credit purchases of P4,500,000, which
represented 75% of the Company’s total purchases. All of the Company’s purchases
have 2/10, n/30 credit terms. Cash payments of P2,450,000 were made within the
discount period while P1,600,000 were paid beyond the discount period. In addition
the Company received total credit memos amounting to P220,000 while cash
refunds from suppliers totaled P90,000,
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 Chapter 2 - Accounts Payable and Notes Payable

Required: Determine the balance of the Company’s accounts payable as of December

31, 2023.
2. During the year 2023, MADONNA Company had the following information involving
its purchases of inventory items:
a. Cash purchases, which are 10% of all purchases, amounted to P600,000.
b. Total cash payments within the discount period amounted P2,328,000 for credit
purchases made under 3/15, n/45 terms.
c. Total cash payments within the discount period amounted P1,980,000 for credit
purchases made under 1/20, n/60 terms.
d. Total cash payments beyond the discount period amounted to P1,400,000.
e. Credit memos received from the supplier amounted to P340,000, while cash
refunds amounted to P110,000.
f. Beginning accounts payable balance amounted to P 1,400,000.

Required: Determine the balance of the Company’s accounts payable as of December

31, 2023.

3. On January 1, 2023, GRAY Company issued a three-year, 12% interest-bearing

promissory note with face amount of P5,000,000 to acquire a building. Market rates
as of that date averaged 12%. Interest is payable every December 31 of each year.

Required; Determine the journal entries for the years 2023 and 2024

4, At the beginning of the year 2023, CROCODILE Company acquired a land by paying
P1,000,000 down payment and issuing a four-year, 10% interest-bearing
promissory note with face amount of P6,000,000. The principal is payable in four
equal annual installments every December 31 ofeach year. Interest is payable on the
same dates as the principal installment payments.
Required: Determine the journal entries for the years 2023 and 2024

5, SAMANTHA Company acquired a transportation equipment on January 1, 2023 by

issuing a noninterest-bearing promissory note with face amount of P4,000,000 and
maturity date of December 31, 2027. Market rates as of January 1, 2023 and
December 31, 2023 averaged 9% and 10%, respectively.
Required: Determine the journal entries for the years 2023 and 2024.

6. On May 1, 2023, ANDREA Company acquired a land for a total price of P8,000,000.
The Company paid a P2,000,000 down payment and issuing a six-year noninterest-
bearing promissory note for the balance. Market rates on January 1, 2023 and
December 31, 2023 averaged 8% and 7%, respectively.

Required: Determine the journal entries for the years 2023 and 2024.

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 Chapter 2 - Accounts Payable and Notes Payable

7. At the beginning of 2023, ROWENA issued a five-year, noninterest-bearing

promissory note with face amount of P5,000,000 for the purchase of an equipment. —
The note is payable in equal annual installments of P1,000,000 starting on Decem ber |
31, 2023. Market rates as of January 1, 2023 and December 31, 2023 averaged 10% —
and 11%, respectively.
Required: Determine the journal entries for the years 2023 and 2024.

8. On October 1, 2023, LESLIE Company acquired a land by issuing a seven-year

noninterest-bearing promissory note with face amount of P8,400,000. The note is
payable in seven equal annual installments every September 30 of each year,
starting in the year 2024. Market rates on the issuance date averaged 8%.

Required: Determine the journal entries for the years 2023 and 2024.

9. On January 1, 2023, JERICHO Company acquired a building by issuing a six-year, 3%

interest-bearing promissory note with face amount of P7,000,000. Market rates as
of that date averaged 9%. Interest is payable every December 31 of each year.
Required: Determine the journal entries for the years 2023 and 2024.

10.0n April 1, 2023, JAMES Company had a financial liability issued for the acquisition
of investments in equity securities. The P6,000,000 face amount financial liability
has a maturity date of March 31, 2028 and interest per annum of 12%. On initial
recognition, this financial liability was irrevocably designated at FVTPL. As of |
December 31, 2023 and 2024, the financial liability had fair values of P5,600,000
and P5,750,000, respectively. There were no changes in the Company’s own credit
risk.
Required: Determine the journal entries for the years 2023 and 2024.

Multiple Choice
1. On December 31, 2023, THOMAS Company reported an unadjusted balance of
P2,500,000. In connection with the review of the accounting manager, the following
data were gathered:
e Acheck dated January 10, 2024 and amounting to P160,000 was given to the
payee on December 20, 2023,
e Acheck dated December 30, 2023 and amounting to P200,000 was given to the
payee only on January 5, 2024.
e Acheck dated December 15, 2023 and amounting to P120,000 was given to the
payee on December 1, 2023. The check is yet to be encashed by the payee.
e An invoice amounting to P170,000 was received and recorded on January 10,
2024, Upon inspection of invoice's details, it was found out that the related goods
were shipped FOB shipping point on December 29, 2023. The goods were
actually received on January 8, 2024.

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 Chapter 2 — Accounts Payable and Notes Payable

From the given information, the adjusted accounts payable balance as of December
31, 2023 shall be
a. P2,870,000 c. P3,030,000
b. P2,830,000 d. P3,150,000

_ As of the end of 2023, SANTORINI Company reported an inventory balance of

P2,000,000 based on physical count and an unadjusted balance in accounts payable
amounting to P1,800,000. The Company’s cut-off procedures generated the
following information on some of the purchase invoices:
e Goods shipped FOB shipping point on December 29, 2023 were actually received
on January 5, 2024. The related invoice amounting to P190,000 was received and
recorded only on January 7, 2024.
e Goods shipped FOB destination on December 28, 2023 were actually received on
January 4, 2024. The related invoice amounting to P120,000 was received and
recorded on December 30, 2023. ;
e Goods shipped FOB shipping point on December 26, 2023 were actually received
on January 2, 2024. The related invoice amounting to P240,000 was received and
recorded on December 29, 2023.

The adjusted accounts payable balance as of December 31, 2023 shall be

a. P1,870,000 c. P2,060,000
b. P1,930,000 d. P2,320,000

The adjusted inventory balance as of December 31, 2023 shall be

a. P2,190,000 c. P2,440,000
b. P2,430,000 d. P2,550,000

. RHODES Company reported an unadjusted accounts payable balance of P3,400,000

as of December 31, 2023. The following additional data were gathered as part of the
Company's purchase cut-off procedures:
Date the goods _ Date the invoice
Invoice Amount Dateshipped werereceived was recorded
1 P210,000 12/28/23 01/03/24 01/03/24
2 150,000 12/30/23 01/06/24 01/07/24
3 280,000 12/27/23 12/31/23 12/30/24
4 180,000 01/03/24 01/09/24 01/10/24
5 300,000 12/24/23 01/05/24 12/28/23
Invoices 1, 3, and 4 were shipped FOB shipping point, while Invoices 2 and 5 were
shipped FOB destination. In addition, there were checks totaling P450,000 that were
unclaimed by the payees as of December 31, 2023.

The adjusted accounts payable balance as of December 31, 2023 shall be

a. P3,830,000 c. P3,610,000
b. P3,990,000 d. P3,310,000

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 Chapter 2 - Accounts Payable and Notes Payable

4. On April 1, 2023, CHARMAINE Company issued a six-year promissory note with a

total face amount of P6,000,000. The note is payable in P1,000,000 annua]
installments every March 31 of each year, starting on March 31, 2024. The
promissory note bears interest of 12% that is payable on the same dates as the
principal installment payments.

Total interest expense for the year 2024 shall be

a. P720,000 c. P600,000
b. P630,000 d. P540,000
Total interest expense for the year 2025 shall be
a. P660,000 c. P510,000
b. P600,000 d. P480,000
5. October 1, 2023, MAUI Company issued a seven-year, noninterest-bearing
promissory note with face amount of P5,000,000. Market rates as of October 1, 2023
and December 31, 2023 averaged 9% and 11%, respectively.

Total interest expense for the year 2024 shall be

a. P251,704 c. P246,165
b. 267,903 _ d.P278,904

Carrying amount of the note payable as of December 31, 2024 shall be

a. P2,981,335 c. P3,249,655
b. P3,048,415 d. P3,105,842 ©

Total interest expense for the year 2025 shall be

a. P268,320 c. P277,892
b. P292,469 d. P274,357

Carrying amount of the note payable as of December 31, 2025 shall be

a. P3,249,655 ¢. P3,322,772
b. P3,542,124 d. P3,489,043

6. On July 1, 2023, HILO Company issued a noninterest-bearing promissory note with

face amount of P7,000,000. Maturity date of the note is set on June 30, 2027. In
addition, the principal amounts are payable in equal annual installments every June
30 of each year, starting on June 30, 2024. Market rates on July 1, 2023 averaged
10%.

Carrying amount of the note payable as of December 31, 2023 shall be

a. P5,547,264 c, P4,351,990
b. P5,824,627 d. P4,569,590
Total interest expense for the year 2024 shall be
a. P494,963 c. P435,199
b. P554,726 d. P489,902

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 Chapter 2 — Accounts Payable and Notes Payable

Carrying amount of the note payable as of December 31, 2024 shall be

a. P4,351,990 c. P4,569,590
b. P3,037,189 d. P3,524,789

Total interest expense for the year 2025 shall be

a. P435,199 c. P303,719
b. P369,459 d. P296,793

7. On January 1, 2023, BROOKLYN Company issued a ten-year, 2% interest-bearing

note with face amount of P8,000,000. Market rates as of that date averaged 10%. The
interest is payable every December 31 of each year.
Total interest expense for the year 2024 shall be
a. P800,000 c. P406,748
b. P160,000 d. P431,422
Carrying amount of the note payable as of December 31, 2024 shall be
a. P4,585,645 c. P4,769,032
b. P8,000,000 d. P4,884,210

Total interest expense for the year 2025 shall be

a. P431,422 c. P431,422
b. P458,565 d. P488,421

Carrying amount of the note payable as of December 31, 2025 shall be

a. P4,585,645 c. P4,769,032
b. P8,000,000 d. P4,884,210

8. On April 1, 2023, AMBASSADOR Company issued a six-year, 7% interest-bearing

financial liability with P3,000,000 face amount to finance the acquisition of
investment in debt securities. This investment is to be accounted for at FVTPL. To
reduce the accounting mismatch, the financial liability is to be accounted at FVTPL.
Interest is payable every March 31 of each year.
As of December 31, 2023 and 2024, financial liability’s fair value amounted to
P3,100,000 and P3,190,000, respectively. During 2023, there were no changes in the
Company’s own credit risk. However, during 2024, changes in the Company’s own
credit risk contributed P30,000 to the increase in the financial liability’s fair value.

The net amount to be recognized in the Company’s 2023 profit or loss shall be
a. P210,000 net decrease c. P110,000 net decrease
b. P157,500 net decrease d. P257,500 net decrease

The net amount to be recognized in the Company’s 2024 profit or loss shall be
a. P270,000 net decrease c. P300,000 net decrease
b. P150,000 net decrease d. P240,000 net decrease

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 Chapter 2 —- Accounts Payable and Notes Payable

9. At the beginning of 2023, MUMBLE Company issued a financial liability to be |

accounted at FVTPL. This liability has a face amount of P5,000,000, maturity date of
December 31, 2029, and interest of 7% that is payable every December 31 of each
year. Fast forward to December 31, 2023, the market rates averaged 8%. Lastly,
benchmark rates averaged 3% and 3.50% as of January 1, 2023 and December 31, ©
2023, respectively.

The financial liability’s carrying amount as of December 31, 2023 shall be

a. P5,000,000 c. P4,768,858
b. P4,882,656 d. P4,954,903
The net amount to be reported in the Company’s 2023 profit or loss shall be
a. P117,344 gain c. P113,798 gain
b. P117,344 loss d. P113,798 loss
The net amount to be reported in the Company's 2023 OCI shall be
a. P117,344 gain c. P113,798 gain
b. P117,344 loss d. P113,798 loss

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