TOPIC 2: NOTES & LOAN PAYABLE

Learning Objectives:
1. State the initial and subsequent measurement of notes and loans payable.
NOTES PAYABLE ➔ are obligations supported by debtor promissory notes.
LOANS PAYABLE ➔ similar to notes payable but the term are used when related to bank loans and other
similar types of financing.

SUMMARY OF MEASUREMENT
Initial Subsequent
1. Short-term payable a. Face amount; or a. Face amount or expected
(interest or non-interest b. Present value (if the settlement amount if the
bearing) transaction clearly initial measurement is face
constitutes financing and amount.
the imputed interest rate b. Amortized cost if the initial
can be determined) measurement is present
value
2. Long-term payable with Face amount Face amount or expected
reasonable interest rate settlement amount
(stated rate approximates
the market rate)
3. Long-term non-interest Present value Amortized cost
bearing payable
4. Long-term payable with Present value Amortized cost
unreasonable interest rate
(stated rate is different
from market rate)
❖ If the cash price equivalent is determinable, the note is initially measured at this amount. The
subsequent measurement is amortized cost.
❖ Amortized cost – the amount at which the financial liability is measured at initial recognition
minus principal repayment (in case of installments) plus or minus the cumulative amortization
between the initial carrying amount and the maturity amount.

SUMMARY OF MEASUREMENT OF FINANCIAL LIABILITIES

Classification Initial Subsequent Amortized? FV changes Interest expense is based on
Financial FVPL FV FV No Yes Stated rate
Liabilities AC FV – TC AC Yes No Effective rate

Concept of TIME VALUE OF MONEY:

TIME VALUE OF MONEY (TVM) ➔ is the concept that money you have own is worth more than the identical sum
in the future due to its potential earning capacity.

INTEREST ➔ money paid regularly at a particular rate for the use of money lent, or for delaying the repayment
of a debt.

Time Value of Money Formula:

Depending on the exact situation in question, the time value of money formula may change slightly. For example,
in the case of annuity or perpetuity payments, the generalized formula has additional or less factors. But in
general, the most fundamental TVM formula takes into account the following variables:
FV = Future value of money
PV = Present value of money
i = interest rate
n = number of compounding periods per year
t = number of years
Based on these variables, the formula for TVM is:
FV = PV x [1 + (i/n)] (n x t)
Assume a sum of P10,000 is invested for one year at 5%. The future value of that money is:
FV = 10,000 x [ 1 + (.05/1)] 1 x 1
= 10,500

Assume the value of 10,500 one year from today, compounded at 5% interest. The present value of that money
is:
PV = FV / [1 + (.05/1)] 1 x 1
= 10,000

Effect of Compounding Periods on Future Value

The number of compounding periods can have a drastic effect on the TVM calculations. Taking the P10,000
example above at 10% interest, if the number of compounding periods is increased to quarterly, monthly, or
daily, the ending future value calculations are:

Quarterly Compounding: FV = P10,000 x [1 + (10% / 4)] ^ (4 x 1) = P11,038

Monthly Compounding: FV = P10,000 x [1 + (10% / 12)] ^ (12 x 1) = P11,047
Daily Compounding: FV = P10,000 x [1 + (10% / 365)] ^ (365 x 1) = P11,052

1. Present value (PV) ➔ This is your current starting amount. It is the money you have in your hand at the
present time, your initial investment for your future.
2. Future value (FV) ➔ This is your ending amount at a point in time in the future. It should be worth more than
the present value, provided it is earning interest and growing over time.
3. The number of periods (N) ➔ This is the timeline for your investment (or debts). It is usually measured in
years, but it could be any scale of time such as quarterly, semi-monthly, monthly, or even daily.
4. Interest rate (I) ➔ This is the growth rate of your money over the lifetime of the investment. It is stated in a
percentage value, such as 8% or .08.
Interest rate types:
a. Simple interest ➔ computed on the original amount as the return on that principal for one time
period.
Formula: SI = P x R x T
Simple illustration:
If you invest P1,000 for ten years at 5% simple interest.
SI = 1,000 x .05 x 10
= P500
b. Compound interest ➔ computed on the original amount as the return on that principal plus all
unpaid interest accumulated to date.
Simple illustration:
If you invest P1,000 for ten years at 5% interest compounded quarterly.
= 1,000 x (.05/4)40
= 643.62

2. Apply present value factors properly.

✓ PV of 1 ➔ used when the settlement of an obligation is lump sum or one-time payment.
✓ PV of OA ➔ used when the settlement of an obligation is on installment basis and the payment is made
at the end of the period.
✓ PV of Annuity due ➔ used when the settlement of an obligation is on installment basis and the payment
is made at the beginning of the period.

Steps to compute the present value:

a. Determine the cash flow of the notes payable (principal and interest payment)
b. Determine the timing of the cash flow (i.e., lump-sum or installment) to compute the present value factor
 c. Compute the present value by multiplying cash flow letter (a) and present value factor (b)

3. Prepare amortization tables.

Amortization – is the process of bringing the initial carrying amount of an asset or liability to its face amount on
maturity date.

Effective interest rate – the rate that exactly discounts the future cash payments over the life of the financial
liability equal to its carrying amount.

Amortized cost – the amount at which the financial asset or financial liability is measured at initial recognition
a. Minus principal repayment
b. Plus or minus the cumulative amortization using the effective interest method of any difference between
the face amount and the present value/initial amount of the note payable

Format:
Face amount of the note = maturity amount (in case of long-term non-interest bearing-note)
Less: Present value or equal to cash equivalent price
Equals: Discount on the issue of the note payable to be amortized over the life of note payable

The amortization of discount is through the use of effective interest method as required under PFRS 9 –
Financial instruments

Amortization table – lump-sum

Date Interest Discount on NP (total interest Carrying amount/Amortized
expense expense) cost/Present value
Issue date - Face amount - PV Initial carrying amount
Subsequent Carrying Discount on NP, beg. –
periods amount x ER subsequent amortization PV, beg. + interest expense

Commonly asked questions:

Carrying amount at year-end = Carrying amount + interest expense or
Face amount – unamortized discount on NP
Interest expense during the period = Carrying amount, at each beg. period x effective rate
Unamortized discount on NP = Discount on NP, beg. – accumulated amortization of discount

Amortization table – installment

Date Payments Interest expense Amortization Carrying
amount/Present value
xxx Equal to installment Carrying amount x Payments – Interest Carrying amount -
payments ER expense Amortization

Commonly asked questions:

1. Carrying amount at year-end = Carrying amount + interest expense – principal repayment or
Carrying amount - amortization
2. Interest expense during the period = Carrying amount, at each beg. period after considering
installment payment x effective rate
3. Unamortized discount on NP = Discount on NP, beg. – accumulated amortization of discount
4. Current and noncurrent portion of notes payables = simply refer to the amortization table. If you are asked
to determine the current portion and noncurrent portion of notes payable, say 12/31/23, the current portion
is equal to the amount in the amortization column of the following year, while the noncurrent portion is the
amount in the present value column of the following year.

4. Explain the accounting for origination fees on loans payable.

Loan payable ➔ similar to note payable; it is also supported by a formal promise to pay a certain sum of
money at specific future date(s). The only difference is the nature and type of transaction. The term “loan
payable” is normally used for bank loan transactions and similar types of financing.
Transaction costs ➔ are “incremental costs that are directly attributable to the acquisition, issue or disposal
of a financial asset or financial liability. An incremental cost is one that would not have been incurred if the
entity had not acquired, issued or disposed of the financial instrument.”

Types of Transaction costs:

1. Origination fees – is an upfront fee charged by a lender to cover the costs of processing the loan. These
are deducted when measuring the carrying amount of a loan payable and are subsequently amortized
using the effective interest method.

2. Direction origination costs (recorded in the books of the lender) – costs incurred by the lender in
connection to lending of funds to the borrower. These are added when measuring the carrying amount
of a loan receivable of the lender and are not accounted in the books of the borrower.

Initial measurement:
Face value of the loan xxx
Less: Origination fees (xxx)
Initial carrying amount of the loan xxx

Subsequent measurement:
o At amortized cost using effective interest method

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