NOTES PAYABLE

Initial measurement
Fair value - transaction cost

Classified into:

Short-term payable Long-term payable that bears

reasonable interest

Initial measurement: face amount Initial measurement: face amount

Subsequent measurement: face Subsequent measurement: face

amount or expected settlement amount or expected settlement

Long term payable that bears no Long term payable that bears unreasonable
interest interest

Initial measurement: fair value discounted Initial measurement: fair value discounted
using imputed interest rate (effective interest using imputed interest rate
rate, market rate and yield rate)
Subsequent measurement: amortized Subsequent measurement: amortized
cost cost

Ex: Non-interest bearing note- Lump sump (Pv of P1)

On 1/1/x1, ABC Co. acquired a piece of equipment in exchange for 100,000 cash and a
non-interest bearing note of 1,000,000 due on 1/1/x4/. The prevailing interest rate of
interest for this type of note is 12%.
Sol:
Face amount: 1,000,000
Pv of P1 @12%, n=3 0.711780247
Initial measurement: 711,780.2478

Face amount: 1,000,000

Less: Initial measurement 711,780.2478
Discount on Notes Payable 288,219.7522

Subsequent measurement

Date Interest Expense Discount on NP Carrying amount

a B C
( c x .12) ( b-a) ( c + a)

1/1/x1 - 288, 219.7522 711,780.2478

12/31/x1 85,413.62974 202,806.1225 797,193.8775

Ex: Non-interest bearing note- Installments

On 1/1/x1, ABC Co. acquired a piece of equipment in exchange for 100,000 cash and a
non-interest bearing note of 1,000,000 that is due in 4 equal annual instalments starting
December 31, 20x1 . The prevailing interest rate of interest for this type of note is 12%
SOL
Face amount: (1m/4) 250,000
Pv of ordinary annuity @12, n=4 3.037349347
Initial Measurement: 759,337.34
Subsequent Measurement

Date Interest Interest Expense Amortization Present Value

Payments B C D
a (d x .12) (a-b) (d-c)
(current) (non-currenf)

1/1/x1 - - - 759,337.34
12/31/x1 250,000 91,120.48 158,879,52 600,457.82
12/31/x2 250,000 72,054.94 177,945.06 422,512.76
12/31/x3 250,000 50,701.53 199,298.45 223,214.29
12/31/x4 250,000 26,785.71 223,214.29 0
(d-a)

Ex: Non-interest bearing note- instalment in advance

On 1/1/x1, ABC Co. acquired a piece of equipment in exchange for 100,000 cash and a
non-interest bearing note of 1,000,000 that is due in 4 equal annual instalments. The first
instalment is due on January 1, 20x1. The prevailing interest rate of interest for this type
of note is 12%.

SOL:
Face amount (1m/4) 250,000
Pv of annuity due of P1 @12%, n=4 3.401831268
Initial measurement 850, 457.82

Subsequent measurement:

Date Interest Interest Expense Amortization Present Value

Payments B C D
a (d x .12) (a-b) (d-c)
(current) (non-currenf)

1/1/x1 - - 850,457.82
1/1/x1 250,000 - 250,000 600,457.82
12/31/x1 250,000 72,054.94 177,945.06 422,512.76
12/31/x2 250,000 50,701.53 199,298.47 223,214,29
12/31/x3 250,000 26,785.71 223,214.29

Ex: Non-interest bearing note- semiannual installments

On 1/1/x1, ABC Co. issued a 3-year, 1,200,000 noninterest bearing note payable in equal
semiannual payments starting on July 1, 20x1. The prevailing interest rate is 10%
n= 3 x 2
Discount rate= 10/2
SOL:
Faca amount (1.2m/6) 200,000
Pv of ordinary annuity @5, n=6 5.075692067
Initial measurement 1.1.x1 1,015,138.41
Jan
July
Dec
July
Dec
July Dec
 Loan Payable

Discount C.A < face amount

Effective interest rate is higher than the
nominal rate

Premium C.A > Face amount

Effective interest rate is lower than the
nominal rate

Ex: On 1/1/x1, Jesse James Co. borrowed 1m from a bank. The bank charged a 3% loan
origination fee. The principal is due on 1/1/x4 but 10% interest is due annually starting on
1/1/x2.

SOL;
Face amount 1,000,000
Less: Origination fee (1m x .03) (30,000)
Initial Measurement 970,000

Trial and error approach

Future cash flow x PV of factor @x% = Present Value

> (1m x Pv of 1 @11%, n=3) + (100,000 x Pv of ordinary annuity @11%,n=3)

>(731,191 + 244,371)= 975,562

> (1m x Pv of 1 @12%, n=3) + (100,000 x Pv of ordinary annuity @12%,n=3)

>(711,780 + 240,183) = 951,963

Interpolation
970,000 - 975,562 = 5,562 = 0.235687952 + 11
951,963 - 975,562 = 23,599
CHAPTER 3
BONDS PAYABLE
- Usually offered to the public and sold to many investors.
Bond premium and discount

Cash proceeds or Effective interest Effect of

Carrying amount vs rate vs Nominal amortization on
Face amount Interest Rate interest expense

Discount C.A < F.A E.I > N.R Interest Expense >
Interest Paid

Premium C.A> F.A E.I < N.R Interest Expense <

Interest Paid

Illustration 1: Bonds issued at discount

On 1/1/x1, ABC Co. issued 1,000, P1,000, 10%, 3%, year bonds for 951,963. Principal is due at
maturity but interest is due annually every year-end. The effective interest is 12%.
To get the Discount on NP
Face amount xxx
Less: Carrying amount xxx
Discount on NP xxx
Subsequent measurement:

Date Interest Interest Expense Amortization Present Value

Payment B C (d+c)
a (d x yield rate) (a - b)
(Face amount x
Nominal Rate)

1/1/x1 - - - 951,963
12/31/x1 100k 114,235.56 14,235.56 966,198.56
12/31/x2 100k 155,943.8272 15, 943.8272 982,142.3872
12/31/x3 100k 117,857.0865 17,857.0865 1,000,000

Illustration 1: Bonds issued at premium

On 1/1/x1, ABC Co. issued 1,000, P1,000, 12%, 3%, year bonds for 951,963. Principal is due at
maturity but interest is due annually every year-end. The effective interest is 10%.

Subsequent measurement
Date Interest Interest Expense Amortization Present Value
Payment B C (d+c)
a (d x yield rate) (a - b)
(Face amount x
Nominal Rate)

Accounting for transaction cost

Transaction cost are deducted when determining the carrying amount of the bonds.

Illustration 1: Bond issued at Face Amount

On 1/1/x1, ABC CO. issued 10%, 1,000,000 bonds at face amount. Principal is due on on Dec.
31, 20x3 but interest is due annually at every year end. ABC Co. paid commission of 48,037 to
underwriters.

Face amount 1,000,0000

Less: transaction cost (48,037)
Carrying amount 1/1/x1 951, 963

Trial and error approach

Future Cash Flow x PV factor at x% = Present Value

First Trial using 12%

> ( 1m x Pv of P1 @ 12%) + ( (1m x .10) x Pv of ordinary annuity due @12%,n=3) = 951,963
> (711,780.2478 + 240,183.1268)= 951,963
>951,963 = 951,963
Subsequent measurement
Date Interest Interest Expense Amortization Present Value
Payment B C (d+c)
a (d x yield rate) (a - b)
(Face amount x
Nominal Rate)
Illustration II: Bond issued at a discount-with transaction cost
On 1/1/x1, ABC Co. issued 1,000,1,000, 10%, 3%, year bonds for 951,963. Principal is due at
maturity but interest is due annually every year-end. The effective interest is 12%. In addition,
incurred bond issuance costs of 44, 829. The effective interest after the adjustment for bond
issue cost is 14%.

Issuance Price: 951,963

Less: Transaction cost (44,829)
Carrying amount 907, 134

Subsequent measurement
Date Interest Interest Expense Amortization Present Value
Payment B C (d+c)
a (d x yield rate) (a - b)
(Face amount x
Nominal Rate)

Issuance of bonds between interest payment dates

Illustration:
On April 1, 20x1, ABC Co. issued 12%, 1m bonds dated January 1, 20x1

Case 1: The bonds were issued at 97 including accrued interest.

Solutions
Cas proceeds including accrued interest (1m x 975) 970,000
Less: accrued interest sold (1m x 12% x 3/12) (30,000)
Carrying amount 04/01/x1 940,000
Cash 970,0000
Discount on NP (1m- 940k) 60,000
Bonds Payable 1,000,000
Interest Expense 30,000

Case 2: The bonds were issued at 97 excluding accrued interest.

Cash proceeds including accrued interest (1m x 975) 970,000

Cash 1,000,0000
Discount on NP (1m-970k) 30,0000
Bonds Payable 1,000,000
Interest Expense 30,000

CHAPTER 7
LEASES PART 1
Lease
- A contract, or part of a contract that conveys the right to use an asset for a period of time
in exchange for consideration.
Lease term
- A non-cancellable period of a lease, together with both:
a. A period covered by an option to extend the lease if the lessee is reasonably certain to
exercise that option
b. A period covered by an option to terminate the lease if the lessee is reasonably certain
not to exercise that option.
Accounting for leases by Lessee
Recognition
A lessee recognizes a lease liability and a right-of-use asset at the commencement date.
Initial Measurement
Present value of the lease payments that are not yet paid at the commencement date.
 Lease payment include:
a. Fixed Payments, including in-substance fixed payments, less any lease
incentives receivable
b. Variable lease payments that depends on an index or a rate
c. Amounts expected to be payable by the lessee under residual value guarantees
d. The exercise price of a purchase option if the lessee is reasonably certain to
exercise that option
e. Payments of penalties
Discount Rate
Interest rate implicit in the lease
If that rate is not readily determinable, the lessee’s incremental borrowing rate is used.

Initial Measurement of Right of use asset

The right of use asset is initially measured at cost. The cost compromises the following:
a. The amount of the initial measurement of the lease liability.
b. Any lease payments made at or before the commencement date, less any lease
incentives received.
c. Any initial direct cost
d. The present value of any decommissioning and restoration cost
Formula:
Step 1: Get the Initial Measurement of Lease Liability and Right of use an asset
Fixed Payments xxx
Pv Value of P1 xxx

Step 2: Subsequent Measurement (Amortization Table)

Step 3: Get the annual depreciation

Cost: (Initial Measurement) xxx
Divided by: (lease term) xxx
Annual depreciation

CHAPTER 5
EMPLOYEE BENEFITS (PART 1)
Recognition
Recognized as expense when employees have rendered service, except to the extent that the
employee benefits form part of other cost of another assets.

Employee benefits already earned by employees but not yet paid are recognized as liabilities.

Four categories of employee benefits under PAS 19

1. short -term employee benefits
2. Post-term employee benefits
3. Other long-term employee benefits
4. Termination Benefit
Short-term employee benefits
a. Salaries, wages, SSS, Philhealth, and PAG-IBIG
b. Paid vacation and sick leave
c. Profit-sharing bonuses
d. Non-monetary benefits
Profit-sharing and bonus plans
1. Before bonus and before tax
B= P x BR
2. After bonus and before tax
B= P- P/1+Br
3. Before bonus and after tax
B= P x 1-Tr/ 1/Br - Tr
4. After bonus and after tax
B= P x 1-Tr/ 1/Br -Tr +1
 Chapter 6
Employee Benefits (Part II)
FVPA is less than PV of DBO, the difference is a deficit.
If there is a deficit, the deficit is a net defined benefit liability.

FVPA is greater than PV of DBO, the difference is a surplus.

If there is a surplus, the net defined benefit asset is the lower of the:
a. Surplus
b. Asset Ceiling

Formula:

Step 1: Get the deficit or surplus

PV of DBO xxx
Less: FVPA xxx
Deficit/ Surplus

Step 2: determine if Net Defined Benefit Liability or Net Defined Benefit Asser
Step 3:
Service Cost
Current Service Cost
Past Service Cost
Any gain or loss on settlements xxx

Net interest n the net defined benefit liability

Interest cost on DBO
Interest cost on plan asset
Interest on the effect of the asset ceiling xxx

Remeasurements of the net defined benefit liability

Actuarial gains and loses
Difference between Interest income on plan asset and return on plan asset
Difference between the interest income oth effects (xxx)
Total Defined Benefit Cost