CHAPTER 2: NOTES PAYABLE & LOANS RECEIVABLE

BAIACC2X
THIRD SEMESTER | ACADEMIC S.Y. 2024-2025

Chapter 2: Notes Payable

Notes Payable – are obligations supported by debtor promissory notes.
Initial Measurement – measured initially at fair value minus transaction costs.
*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.
Subsequent Measurement –
 If initially measured at face amount, the subsequent measurement is at face amount or
expected settlement amount.
 If initially measured at present value, the subsequent measurement is at amortized cost.
*Amortized cost is determined using the effective interest method.
**Effective interest method – is a method of calculating the amortized cost of a financial asset or financial
liability and of allocating the interest income or interest expense over the relevant period.

Notes payable are classified into the following:

Initial Measurement
(Fair value minus transaction
Type of Note Payable Subsequent Measurement
costs. The fair value is
determined as follows:)
Short term a. Face amount; or a. Expected settlement amount
b. Present value (If the (if the initial measurement is face
transaction contains a significant amount)
financing component) b. Amortized cost (if the initial
measurement is present value.)
Long-term with reasonable Face amount Expected settlement amount
interest rate
Long-term noninterest bearing Present value Amortized cost
Long-term with unreasonable Present value Amortized cost
interest rate
Note: if the cash price equivalent is determinable, the note is initially measured at this amount. The
subsequent measurement is amortized cost.

Short-term payables – the fair value of short-term payables may be equal to its face amount. However, if
the transaction contains significant financing component, the fair value of the short-term payable is equal to
its present value.
Long-term payables
CHAPTER 2: NOTES PAYABLE & LOANS RECEIVABLE
BAIACC2X
THIRD SEMESTER | ACADEMIC S.Y. 2024-2025

 The fair value of a long-term payable that bears a reasonable interest rate is equal to the face
amount. An interest rate is deemed ‘reasonable’ if it approximates the market rate at the
transaction date.
 The fair value of a long-term payable that bears no interest (long-term noninterest bearing payable)
is equal to the present value of the future cash flows on the instrument discounted using imputed
interest rate.
 The fair value of a long-term payable that bears an unreasonable interest rate is also equal to the
present value of the future cash flows on the instrument discounted using an imputed interest rate.

*Effective interest rate or imputed rate – is the rate that exactly discounts the future cash payments of a
financial liability equal to its carrying amount.

Cash price equivalent – the fair value of a payable may be measured in relation to the cash price
equivalent of the noncash asset (noncash consideration) received in exchange for the payable.
Cash price equivalent is the amount that would have been paid if the transaction was settled outright on a
cash basis, as opposed to an installment basis or other deferred settlement.

Lump Sum Installment

lump sum is a one-time payment made for the Installments refer to a payment plan where the
total amount owed. The entire amount is paid total amount due is divided into smaller,
at once, rather than in parts or installments. periodic payments over time. Each payment is
made at regular intervals, such as monthly or
quarterly.
Accounting Recognition: Lump sum expenses or Accounting Recognition: Installment-based
revenues are recognized in one period. expenses or revenues are recognized over
multiple periods.
Example: A company buys equipment for $10,000 Example: A company buys equipment for $10,000
but pays in 5 monthly installments of $2,000. The but pays in 5 monthly installments of $2,000. The
equipment purchase would be recorded as a equipment purchase would be recorded as a
liability, and each monthly payment reduces the liability, and each monthly payment reduces the
outstanding liability, with the expense or asset outstanding liability, with the expense or asset
being recognized over the installment period. being recognized over the installment period.

Carrying Amount of N/P Computation: Principal – Discount on N/P

CHAPTER 2: NOTES PAYABLE & LOANS RECEIVABLE
BAIACC2X
THIRD SEMESTER | ACADEMIC S.Y. 2024-2025

Types of Interest
Simple Interest Compounded Interest
Interest is computed only on the outstanding Interest is computed on both outstanding
principal balance. balances of principal and accrued interest.

When to use the Present Value (PV of 1) and Present Value of Annuity (Ordinary Annuity of 1)
Present Value of Annuity (Ordinary Annuity of
Present Value (PV of 1)
1)
Formula in calculator: 1 + rate / / = = = Formula in calculator: 1 + rate / / = = = M+ 1-
Example: 1+12% / / = = = = MRC / rate
Example: 1+12% / / = = = = M+ 1 – MRC / 12%
Where:
 The number of equals depends on the Where:
number of years.  The number of equals depends on the
number of years.
When to use: When to use:
 Single Lump Sum Payments  Multiple Equal Periodic Payments
 Investment analysis (Installment)
 Loan repayment  Retirement Planning
 Loan Repayment Schedules

Current and non current portion of a note payable

 When the principal amount is due in installments, the carrying amount of the note includes both
current and noncurrent portions. These portions are presented separately in the financial
statements. To determine the current and noncurrent portions, we simply refer to the amortization
table. The current portion is the amortization in the immediately following year. This is the portion
of the next year’s payment applicable to the principal. The noncurrent portion is the present
value in the immediately following year.
For example, the carrying amount of the note on December 31, 20x1 is P600,457. The current and
noncurrent portions of this amount are determined as follows:

Noninterest-bearing note – Installment in advance

CHAPTER 2: NOTES PAYABLE & LOANS RECEIVABLE
BAIACC2X
THIRD SEMESTER | ACADEMIC S.Y. 2024-2025

 No interest is recognized on the first installment because interest is incurred only after a passage
of time.
Discounting semiannual cash flows
 When discounting cash flows that are due in semiannual installments, the “n” (period) used in
the present value factor is multiplied by 2 because there are two semiannual installments per
year. Furthermore, the effective interest rate is divided by 2 because interest rates are normally
expressed on a per-annum basis.
 Example: 6 years (3yrs x 2) and the discount rate is 5% (10% / 2)
Discounting non-uniform (unequal) cash flows
 Non-uniform installments refer to payment schedules in which the amounts of the installments are
not equal over the course of the repayment period.
 Annuity factors are applicable only when the series of cash flows are uniform or unequal.
 When the cash flows vary, the PV of 1 should be used.
 A cash flow that is due one period from initial recognition is discounted using an ‘n’ of 1. A cash flow
that is due two periods from initial recognition is discounted using an ‘n’ of 2, and so on.
Example:
Initial Measurement: 10% prevailing interest
Date Cash Flows PV of 1 @10%, n= 1 to 3* Present Value
Dec. 31, 20x1 600,000 0.09090 (1.10 / / = ) 545,454
Dec. 31, 20x2 400,000 0.82645 (1.10 / / = = ) 330,580
Dec. 31, 20x3 200,000 0.75131 (1.10 / / = = = ) 150,262
Totals 1,200,000 1,026,296

Subsequent Measurement: 10% prevailing interest

Amortization
Interest Expense
(Payments –
Date Payments (Present value x Present Value
Interest
10%)
Expense)
Jan. 1, 20x1 1,026,296
Dec. 31, 20x1 600,000 102,630 497,370 528,926
Dec. 31, 20x2 400,000 52,893 347,107 181,819
Dec. 31, 20x3 200,000 18,181 181,819 0