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Notes Payable

The document outlines the initial measurement of financial liabilities, specifically notes payable, emphasizing that they are recognized at fair value minus transaction costs. Short-term notes are measured at face amount or present value, while long-term notes with reasonable interest rates are recognized at face amount, and non-interest bearing notes at present value. It also explains transaction costs, interest rates, origination fees, and defines fair value in the context of financial instruments.

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Eunice Catubay
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7 views2 pages

Notes Payable

The document outlines the initial measurement of financial liabilities, specifically notes payable, emphasizing that they are recognized at fair value minus transaction costs. Short-term notes are measured at face amount or present value, while long-term notes with reasonable interest rates are recognized at face amount, and non-interest bearing notes at present value. It also explains transaction costs, interest rates, origination fees, and defines fair value in the context of financial instruments.

Uploaded by

Eunice Catubay
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

1

NOTES PAYABLE

Chapter 2 - Notes Payable

How are Financial Liabilities generally measured initially?

They are recognized at Fair Value minus Transaction Costs directly attributable to the
issuance.

(Exception: Financial liabilities at Fair Value Through Profit or Loss (FVPL) are measured at Fair
Value, and transaction costs are expensed immediately).

How are Short-Term Notes Payable initially measured?

They are initially measured at either Face Amount or Present Value.

How are Long-Term Notes Payable with a reasonable interest rate initially recognized?

At Face Amount.

How are Long-Term Non-Interest Bearing notes (or notes with unreasonable interest rates)
initially measured?

At Present Value.

What are Transaction Costs?

Incremental costs directly attributable to the issue of a financial liability that would not have
been incurred if the entity had not issued the financial instrument.

What is the distinction between Stated Interest Rate and Effective Interest Rate?

●​ Stated Rate: The rate appearing on the face of the note (nominal, coupon, or face rate).
2

●​ Effective Rate: The rate used in present value computations (imputed, market, or yield
rate).

How are Origination Fees on loans payable accounted for?

They are deducted from the carrying amount of the loan and subsequently amortized using
the effective interest method.

What effect do Origination Fees have on the effective interest rate?

They are treated as an adjustment to the effective interest rate, included in its calculation over
the expected term of the loan.

If a noncash consideration is exchanged for a note payable, how is the note initially measured?

If available, the note is measured at the cash price equivalent of the noncash consideration
received.

Define Fair Value.

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.

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