Note Payable

Note Payable: •Written promises to pay a certain sum of money on a specified future date. •Arise from purchases, financing, or other transactions. •Classified as either “Short-term” or “Long-term” depending on the payment due date. •Also classified as “Interest earing” or “!ero-Interest earing”. Measurement of Notes Payable Initially Initially,, notes notes payale payale shall e measure measured d at fair "alue #hich #hich is e$ual e$ual to the present present "alue "alue or  discounted "alue. Suse$uently, the note payale shall e measured at amorti%ed cost. •

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Note Issued Solely for Cash When a note is issued solely for cash, the present "alue is e$ual to the cash proceeds. &he entry to record the issuance of the notes' Cash (( )iscount on *ote +ayale (( *ote +ayale (( •

Note: &he Note: &he discount deited, is the discount on notes payale for the #hole year, the interest. So, if it is needed, the discount could e amorti%ed as interest e(pense. Interest (pense (( )iscount on *ote +ayale (( Straight line method is method  is used in amorti%ing the discount on note payale. &he discount on notes payale is a direct deduction from the notepayale. *ote +ayale (( Less')iscount on *ote +ayale  (( /oo0 "alue (( Note' Note' &he oo0 "alue is actually the amorti%ed cost of the note payale. Two Types of Notes Payable A. Intere Interest st Bearin Bearing g Note Note ournal entries !Issuan"e of an interest bearing note: Cash *ote +ayale

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!Payment of the note in"luding interest: *otes +ayale Interest (pense   Ca Cash

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#ero$Interest$ #ero$Interest$ Bearing Not •)oes not e(plicitly state an interest rate on the face of the note ut Interest is still "harged. •At maturity the orro#er must pay ac0 an amount greater than the cash recei"ed. ournal entries •Issuance of a %ero-interest-earing note' Cash )iscount on *ote +ayale *ote +ayale

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Interest Bearing Note Issued for Property When a property or noncash asset is ac$uired y issuing a note #hich is interest-earing, the property or asset is recorded at pur"hase pri"e the purchase price is the present "alue of the note and therefore the fair "alue of the property ecause the note issued is interest-earing. •

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Non$Interest bearing Note Issued for Property #hen an interest earing note is issued for property, the property is recorded at the cash price of the property. &he cash price is assumed to e the present "alue of the note issued. &he difference et#een the cash price and the face "alue of the note issued represents the imputed interest. &he imputed interest is ased on sound philosophy that no lender #ould part a#ay his money or property interest-free.

 A non interest earing note is a det for #hich there is no documented re$uirement for the orro#er to pay the lender any rate of interest. If such a note #ere to e resold to a third party, the det #ould e sold at a discount to its face amount, so that the third party purchaser #ould e"entually reali%e a gain #hen it #as redeemed y the orro#er at its face amount. If a non interest earing note is a ond, the issuer is selling the ond at a deep discount and committing to pay ac0 the face amount of the ond on its maturity date. &his approach allo#s the issuer to a"oid ma0ing periodic interest payments on the ond. Instead, all cash payment oligations y the issuer are concentrated at the maturity date of the ond. &he holder of a non interest earing note should recogni%e imputed interest income on the instrument. &his re$uires the follo#ing steps' 1. Calculate the present "alue of the note, discounted ased on the mar0et rate of interest. 2. 3ultiply the mar0et rate of interest y the present "alue of the note to arri"e at the amount of interest income. 4. 5ecord the interest income as a credit to interest income and a deit to an asset account for the in"estment in the note. 6"er time, the ongoing series of deits associated #ith the recognition of  interest income #ill increase the asset amount to the face "alue of the note. 7. When the issuer pays off the note, record a deit to cash and a credit to the asset account for the in"estment in the note. &he same approach is used y the issuer of the note, e(cept that interest e(pense is recorded, and the "alue of a note payale liaility account is gradually increased until such time as the det is paid off at its face "alue. Similar Terms  A non interest earing note is also 0no#n as a zero-coupon bond .

Ano ba ang promissory note? Para saan ba ito? According sa Act No. 2031, Chapter 16, Section 18 !sa ating Negotiab"e #nstr$ments %a&' Sec. 18. Promissory note, de(ined. ) A negotiab"e promissory note &ithin the meaning o( this Act is an unconditional promise inwriting made by one person to another, signed by the ma*er, engaging to pay on demand, or at a fixed or determinable future time , a sum certain in money to order or to bearer. +here a note is dra&n to the ma*ers o&n order, it is not comp"ete $nti" indorsed by him. Sa mada"ing sabi, ito y$ng $tang na sin$"at mo, binigay mo sa nagpa$tang sayo at sinasabi mo na -babayaran mo y$n, promise. /aya promissory note, hehehe. $t serio$s"y, ganon nga y$n. /$ng mapapansin nyo, sa de(inition, may mga high"ighted parts. $n *asi y$ng mga e"ements ng isang Negotiab"ePromissory note. Pero since (inancia" acco$nting ang itata"a*ay *o dito, hindi nyo naman *e"angang hanapin yan sa $i nyo. Ang importante sa test nyo sa (inancia" acco$nting, y$ng mga data sa promissory notes. I. TYPES 4here are t&o types o( Notes !recei5ab"epayab"e'. • •

#nterest7earing Notes Non7interest earing Notes Sa da"a&ang nabanggit, tandaan niyo pa"agi na parehong may interest yan. Ang interest *asi ay ang -payment (or the $se o( money. Ano ang pinag7iba ng da"a&a? Sa interest-bearing notes, the rate is app"ied to the AC9 o( the note beca$se theinterest is not imputed in the face amo$nt o( the note yet. So *$ng may interest bearing note *a payab"e in one year &orth P2,000 at an interest rate o( 3: per ann$m, sa isang taon, ang interest nya ay P60 Sa non-interest bearing notes, ang interest ay imputed na sa !"E amo$nt ng note. So, pag na*ita mo y$ng (ace amo$nt non7interest bearing note, *asama na d$n y$ng interest. /$ng baga, y$n y$ng ($t$re 5a"$e ng note mo !Principa" p"$s #nterest'. So, ano gaga&in mo para macomp$te mo y$ng interest? 9di i7present 5a"$e mo y$ng note. So sa e;amp"e *anina, *$ng may N

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pa"aging mag7aaccr$e ng interest at year end !pag "ong7term ang notes, meaning e;tends to more than 1 year' a"amin m$na *$ng interest bearing or non7interest bearing ang note. a"a"aman mo naman ito depende sa &ording ng prob"em. @s$a""y pag interest bearing ang sinasabi - bearing an interest o( o di *aya -an interest bearing note. care($""y ta*e note o( the BA49 (or it is important in comp$ting the interest. /$ng seria" !insta""ment' ang bayad ng principa", mag7ingat. Bapat iamortie ang principa" pa"agi para tama ang interest na ma*o*omp$te mo. ang rate na binibigay, $n"ess other&ise speci(ied, ay ANN@A% interest. So pag short term "ang ang note, pa"aging iappropriate based "ang *$ng gano *ataga" y$ng note.

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I&TE'EST (E!'I&) &*TE 1. Ass$me that on Apri". 1 2010, 4omasino Corp. iss$ed a 307day note (or P2,000, bearing an interest o( 2: per ann$m. +hat are the entries? &e had an interest o( 3 pesos comp$ted as !2,000  2:  30360'. 4andaan, inappropriate *o y$ng interest sa 30 days "ang.

2. +  3=,000 + 60,000 !3=,000 G 2=,000' ++  60,000 !3=,000 2=,000'+/ 2=,000 ang interest (or the year ay ang tota" na interest na na7inc$rearned (or the &ho"e year

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ada"i "ang diba?

&*&-I&TE'EST (E!'I&) &*TE Sa non7interest bearing note entries, parang bonds "ang yan. Hindi gaano naiiba y$ng entries nito sa bonds *asi dito, &e"" $se a -Bisco$nt on Notes Payab"e acco$nt. 4he disco$nt &i"" represent a Be(erred #nterest #ncome !on the payees side' or an Prepaid #nterest 9;pense !on the ma*ers side' &hich has to be amortied year"y to re("ect in the income statement the amo$nt being recognied as interest incomee;pense. Sa non7interest bearing note, ang PE