NOTES PAYABLE
Notes payable are obligations supported by debtor promissory notes.
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.
The “fair value” is equal to the present value of the future cash payment to settle the note
payable.
Initial measurement
Short-term notes
Short-term notes payable are initially measured at face amount or present value.
The fair value of a short-term payable may be equal to its face amount.
However, if the arrangement effectively constitutes a financing transaction and the
imputed can be determined without undue cost or effort, the fair value of the short-
term payable is equal to its present value.
Long-term notes
Long-term notes that bear a reasonable interest rate (interest bearing notes) are
initially recognized at face amount.
Long-term non-interest bearing notes and long-term notes with unreasonable interest are
initially measured at present value
Cash Price Equivalent
The fair value of a payable may be measured in relation to the cash price equivalent.
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 subsequently measured at
face amount or expected settlement amount
Notes payable that are initially measured at present value are subsequently measured at
amortized cost. The amortized cost is determined using the effective interest method.
Illustration
On July 1, 20x2, Wonwoo Company issued a 5-year note payable with a face amount of P250,000
and an interest rate of 10%. The terms of the note require Wonwoo to make five annual
payments of P50,000 plus accrued interest, with the first payment due June 30, 20x3.
Wonwoo’s accounting period is the calendar year.
Required: Prepare the entries for 20x2, 20x3, and 20x4.
Illustration:
On January 1, 20x2, Woozi Company acquired a tract of land for P5,250,000. Woozi Company
paid a P1,250,000 down and signed a non-interest note for the balance which is due on
January 1, 20x5. There was no established exchange price for the land and the note had no
ready market. The prevailing interest rate for this type of note was 12%. The present value
of 1 at 12% for 3 periods is 0.7118.
Required: Prepare all indicated entries for 20x2 to 20x5.
Illustration:
On January 1, 20x2, Hoshi Company acquired a building for P5,000,000. Hoshi Company paid
P500,000 down and signed a noninterest bearing promissory note for the balance, payable in 3
equal annual installments every December 31 of each year.
The prevailing interest rate for a note of this type is 12%. The present value of an
ordinary annuity of 1 for three periods is 2.4018.
Required: Prepare all indicated entries from 20x2 to 20x4.
