Notes Payable

A promissory note is an unconditional promise in writing made by one person to another, signed by the maker,
engaging to pay on demand or at a fixed or determinable future time a sum certain in money to order to bearer.
Types of Notes Payable
 Short Term Notes Payable
 Long-term Interest-Bearing Notes Payable
o Installment- more than one maturity date, series of payment
o Term Notes Payable- one time payment, one maturity date
o Fully amortizing note- every time na nagbabayad ka, may binabayaran ka nang principal may binabayaran
ka ring interest. At maturity date, mawawala na yung notes payable.
 Long-term Non-Interest-Bearing Notes Payable
Initial Measurement of Notes Payable
Fair Value of the Note less transaction cost that are directly attributable to the issue of the note Payable.
Fair Value= Face Amount/ Present Value of Future Payment
Directly attributable cost during transaction is deducted to the cost
Fair Value minus transaction cost
Subsequent Measurement of Notes Payable (F/S)
Recorded subsequently at amortized Cost using the effective-interest method.
Short Term Notes Payable- no amortization
Initial measurement
Face Amount= principal
Subsequent Measurement
Face Amount
Interest Payment
Face Amount x Nominal Rate
Nominal rate = stated rate/ contract rate/ coupon rate
Interest Expense
Face Amount x Nominal Rate
Long-term Interest Bearing Notes Payable with Realistic Interest Rate
Realistic Interest Rate- nominal rate = effective rate
Initial Measurement
Face Amount- normally face amount of long term interest-bearing NP with realistic rate is equal to
present value of future payment
Subsequent Measurement
Face Amount- interest expense = interest payment
Interest Payment
Face Amount x Nominal rate
Interest Expense
Face Amount x Nominal Rate
Long-term Interest Bearing Notes Payable with Unrealistic Interest Rate
Face Amount is NOT equal to Present Value
Initial Measurement
Present Value
Subsequent Measurement
Amortized Cost
Installment Notes Payable
An installment is an obligation or liability that requires the borrower to repay the principal to the lender in a
series of periodic payments
Installment Notes with Equal Periodic Principal Payments
Total Payment every year is NOT equal but principal payment is equal.
 On March 31. 2020, Bulls Corp. issued a P 3,000,000 12% promissory notes for machinery
purchased. Equal principal Payment of P 1,000,000 and interest are payable annually every March 31
starting March 31, 2021.
Period Principal Payment Interest Total Payment
1 1,000,000 360,000 1,360,000
2 1,000,000 240,000 1,240,000
3 1,000,000 120,000 1,120,000
Total Payment = principal + interest
Interest = Principal x Rate x Time
Journal Entries:
March 31, 2020
Machinery 3,000,000
Notes Payable 3,000,000
December 31, 2020
Interest Expense 270,000
Interest Payable 270,000
March 31, 2021
Interest Expense 90,000
Interest Payable 270,000
Notes Payable 1,000,000
Cash 1,360,000

INSTALLMENT NOTES WITH EQUAL PERIODIC PAYMENTS (Principal and Interest Payments)
Total Payments every year is equal but principal payment is NOT.
Universe Co. issues P 800,000, 8%, 5-year notes payable on January 1, 2021, to obtain
financing for a new research laboratory. The terms provide for annual installment payments of P 200,365
starting December 31, 2021.
200,365 x 5 = 1,001,825 – 800,000 = 201,825 – cost of borrowing (Total Payment – Principal Amount)
Journal Entries:
January 1, 2021
Cash 800,000
Notes Payable 800,000
December 31, 2021
Interest Expense 64,000
Carrying Amount x rate (800,000 x 8%)
Notes Payable 136,365
Cash Payment – Interest Expense (200,365 – 64,000)
Cash 200,365
December 31, 2022
Interest Expense 53,091
Carrying Amount x rate (663,365 x 8%)
Notes Payable 147,274
Cash Payment – Interest Expense (200,365 – 53,091)
Cash 200,365
 December 31, 2021
Current Liability 147,274
Non-Current Liability 516,361
Total 663,635
LONG-TERM NON-INTEREST BEARING NOTES PAYABLE
Nominal rate is equal to zero.
Face Amount (interest is included) is NOT equal to Present Value of Future Payment.
Face Amount is normally greater than Present Value of Future Payment
Face Amount = Maturity Value

Initial Measurement
Cash Price Equivalent – amount that would have been paid if the transaction was settled
outright on cash basis.
Journal Entry:
Dr. PPE
Dr. Discount on Notes Payable
Cr. Notes Payable
Present Value of all cash payments using the effective interest rate.
Present Value of 1 – one-time cash payment
(1+i)−n
Present Value of Annuity – equal series of payment

[ ]
−n
1−(1+i)
i
Subsequent Measurement
Amortized Cost = Face Amount – Discount/ Face Amount + Premium
Discount – contra-liability
Premium - Adjunct
Interest Expense
Carrying Amount, beginning x Effective Interest Rate
On January 1, 2021, DEF Co. issued a three-year, P 4,000,000, non-interest bearing promissory notes for a
machinery purchased. The equivalent price of the machinery acquired is P 3,005,259. The imputed interest rate is
10%.
−3
PV =4,000,000 ( 1+10 % )
PV =3,005,259
Journal Entries:
January 1, 2021
Machinery 3,005,259
Discount on Notes Payable 994,741
Notes Payable 4,000,000
Face Amount – Discount = Carrying Amount
December 31, 2021
Interest Expense 300,526
 Discount on Notes Payable 300,526
Carrying Amount X Effective Interest Rate
(3,005,259 x 10%)
December 31, 2022
Interest Expense 330,579
Discount on Notes Payable 330,579
(4,000,000 – (994,741 – 300,526) = 3,305,785 x 10% = 330,579
BONDS PAYABLE
A long-term debt instrument that obligates the issuing company (debtor) to repay a specified amount of
money at a determinable future date and to make periodic interest payment at a stated rate until the principal sum is
paid.
Bond contract is known as a bond indenture.
Issuer – debtor
Creditor – holder
Represents a promise to pay:
1. Sum of money at designated maturity date, plus
2. Periodic interest at a specified rate on the maturity amount (face value)
Paper certificate, typically a P1,000 face value. (Total Face Value or Principal per par = No. of bonds x Face
value per bond)
Interest Payments usually made semi-annually.
Used when the amount of capital needed is too large for one lender to supply.

Common Types of Bonds:

Secured Bonds
Unsecured Bonds
Term Bonds
Serial Bonds
Callable Bonds – issuer have the option to pay before maturity date
Redeemable Bonds – holder have the option to redeem before maturity date
Convertible Bonds –
Commodity-Backed Bonds – principal or interest payment depends on a commodity (ex. gold)
Deep-Discount Bonds –
Registered Bonds –
Bearer Bonds – Coupon Bonds
Income or Revenue Bonds –

Interest Rate
Stated, coupon, or nominal rate = rate written in the terms of the bond indenture
Bond issuer sets this rate
Stated as a percentage of bond face value (par)
Market rate or effective yield = rate that provides an acceptable return commensurate with the
issuer’s risk.
Rate of interest actually earned by the bondholders.
Normally, stated rate is NOT equal to Market rate.
Interest Payment (Interest paid to the bondholder) = Stated Rate x Face Value of the bond
Interest Expense (recorded as interest expense) = Market Rate x Carrying Value of the bond
Carrying Value/ Amortized Cost = Face Value + Premium – Discount
Initial Measurement
Fair Value – Transaction Cost
Fair Value = Present Value of the principal and interest payments using the effective interest rates
 Present Value of the principal = Present Value of 1=(1+i)−n

[ ]
−n
1−( 1+i )
Interest payments = Present Value of Annuity=
i

Market Rate ¿ Stated Rate Issued at Discount Cash ¿ Face Amount

Market Rate ¿ Stated Rate Issued at Par Cash ¿ Face Amount
Market Rate ¿ Stated Rate Issued at Premium Cash ¿ Face Amount

Journal Entries:
Bond Issued at Discount
Cash xx
Discount on Bonds Payable xx
Bonds Payable xx
Bond Issued at Premium
Cash xx
Bonds Payable xx
Premium on Bonds Payable xx
Amortized Cost/ Carrying Value = Face Amount – Discount
Amortized Cost/ Carrying Value = Face Amount + Premium

On January 1, 2020, A Inc. issued 10,000 P1,000 face value, bonds payable in 10 year, 10-percent callable bonds.
Interest is payable every June 30 and December 31.
Face Amount (10,000 x 1,000) = 10,000,000
Contract rate = 10%
Issue Price = Present Value of Bonds Payable = Present Value of Principal + Present Value of Interest
Payment
Market Rate = 12%
Present Value of Principal ¿ Present Valueof 1=(1+i)−n
12% −20
¿ 10,000,000(1+ )
2
¿ 3,118,047
Present Value of Interest Payment
?
Periodic Interest Payment=Face Value × Stated Rate ×
12
6
¿ 10,000,000 ×10 % ×
12
¿ 500,000

Present Value of Interest Payment=Periodic Interest Payment × [ 1−( 1+i )−n

i ]
[ ( )
]
−20
12 %
1− 1+
2
¿ 500,000 ×
12%
2
¿ 5,734,961
Present Value of Bonds=3,118,047+5,734,961
¿ 8,853,008
 Journal Entry
Cash 8,853,008
Discount on Bonds Payable 1,146,992
Bonds Payable 10,000,000

Market Rate = 8%
Present Value of Principal ¿ Present Valueof 1=(1+i)−n
8 % −20
¿ 10,000,000(1+ )
2
¿ 4,563,869
Present Value of Interest Payment
?
Periodic Interest Payment=Face Value × Stated Rate ×
12
6
¿ 10,000,000 ×10 % ×
12
¿ 500,000

[ ]
−n
1−( 1+i )
Present Value of Interest Payment=Periodic Interest Payment ×
i

[ ( )
]
−20
8%
1− 1+
2
¿ 500,000 ×
8%
2
¿ 6,795,163
Present Value of Bonds=4,563,869+6,795,163
¿ 11,359,032
Journal Entry
Cash 11,359,032
Premium on Bonds Payable 1,359,032
Bonds Payable 10,000,000

Subsequent Measurement
Measured at Amortized Cost
Carrying Amount (Present Value of Bonds) + Discount Amortization – Premium Amortization
Interest Expense = Carrying Amount x Effective Interest Rates
On January 1, 2020, A Inc. issued 5,000 P1,000 face value, bonds payable in 5 year, 8-percent callable bonds.
Interest is payable every June 30 and December 31. Effective rate is 10%.
Present Value of Principal ¿ Present Value of 1=(1+i)−n
 −10
10 %
¿ 5,000,000(1+ )
2
¿ 3,069,566
Present Value of Interest Payment
?
Periodic Interest Payment=Face Value × Stated Rate ×
12
6
¿ 5,000,000 ×8 % ×
12
¿ 200,000

[ ]
−n
1−( 1+i )
Present Value of Interest Payment=Periodic Interest Payment ×
i

[ ( )
]
−10
10 %
1− 1+
2
¿ 200,000 ×
10 %
2
¿ 1,544,347
Present Value of Bonds=3,069,566+ 1,544,347
¿ 4,613,913
Journal Entry:
Issuance
Cash 4,613,913
Discount 386,087
Bonds Payable 5,000,000
Interest Date Cash Interest Discount Unamortized Carrying
Period Payment Expense Amortization Discount Amount
(CA*i) (IE-CP) (UD-DA) (CA+DA)
0 1/1/2020 376,087 4,613,913
1 6/30/2020 200,000 230,196 30,196 354,391 4,644,609
2 12/31/2020 200,000 232,230 32,230 322,161 4,676,839
3 6/30/2021 200,000 233,842 33,842 288,319 4,710,681
4 12/31/2021 200,000 235,534 35,534 252,785 4,746,215
5 6/30/2022 200,000 237,311 37,311 215,474 4,783,526
6 12/31/2022 200,000 239,176 39,176 176,298 4,822,702
7 6/30/2023 200,000 241,135 41,135 135,163 4,863,837
8 12/31/2023 200,000 243,192 43,192 92,971 4,907,029
9 6/30/2024 200,000 245,351 45,351 47,619 4,952,381
10 12/31/2024 200,000 247,619 47,619 0 5,000,000

Interest Date Cash Interest Premium Unamortized Carrying

Period Payment Expense Amortization Premium Amount
0 811,090 10,811,090
1 500,000 432,444 32,444 778,646 10,778,646
2 500,000
3 500,000
4 500,000
5 500,000
6 500,000
7 500,000
8 500,000
9 500,000
10 500,000