ASSIGNMENT NO.

5
NOTE PAYABLE
Refinancing and fair value option

Problem 1
On September 1, 2023, Pine Company issued a note payable to National Bank in the amount of
P1,800,000, bearing interest at 12%, and payable in three equal annual principal payments of P600,000.
On this date, the bank's prime rate was 11%. The first interest and principal payment was made on
September 1, 2024.

On December 31, 2024, what amount should be reported as accrued interest payable?
a. 44,000
b. 48,000
c. 66,000
d. 72,000

Problem 2
Mann Company reported on June 30, 2024 a 10% note payable in the amount of P3,600,000. The note is
dated October 1, 2022 and is payable in three equal annual payments of P1,200,000 plus interest. The
first interest and principal payment was made on October 1, 2023.

On June 30, 2024, what amount should be reported as accrued interest payable?
a. 270,000
b. 180,000
c. 90,000
d. 60,000

Problem 3
At year-end, Roth Company issued a P1,000,000 face amount note payable to Wake Company in
exchange for services rendered to Roth Company. The note, made at usual trade terms, is due in nine
months and bears interest, payable at maturity, at the annual rate of 3%. The market interest rate is 8%.
The compound interest factor of 1 due in nine months at 8% is .944.

At what amount should the note payable be reported at year-end?

a. 1,030,000
b. 1,000,000
c. 965,200
d. 944,000
Problem 4
Loob Company had the following loans at 12% interest payable at maturity. The entity repaid each loan
on scheduled maturity date.
Date Amount Maturity date Term
11/1/2023 500,000 10/31/2024 1 year
2/1/2024 1,500,000 7/31/2024 6 months
5/1/2024 3,000,000 1/21/2025 9 months
The entity recorded interest expense when the loans are repaid. As a result, interest expense of
P150,000 was recorded in 2024.

1. What amount should be reported as interest expense for 2024?

a. 150,000
b. 380,000
c. 390,000
d. 500,000

2. If no correction is made, by what amount would interest expense for 2024 be understated?
a. 230,000
b. 350,000
с. 240,000
d. 0

Problem 5
On December 31, 2023, Bart Company purchased a machine from Helix Company in exchange for a
noninterest bearing note requiring eight payments of P200,000. The first payment was made on
December 31, 2023 and the others are due annually on December 31. At date of issuance, the prevailing
rate of interest for this type of note was 11%. The PV of an ordinary annuity of 1 at 11% for 8 periods is
5.146, and the PV of an annuity of 1 in advance at 11% for 8 periods is 5.712.

1. On December 31, 2023, what is the carrying amount of the note payable?
a. 1,142,400
b. 1,029,200
c. 1,046.200
d. 942,400

2. What amount should be reported as interest expense for 2024?

a. 125,664
b. 103,664
c. 176,000
d. 154,000
Problem 6
At the beginning of current year, Pares Company borrowed P3,600,000 from a major customer
evidenced by a noninterest bearing note due in three years. The entity agreed to supply the customer's
inventory needs for the loan period at lower than market price. At the 12% imputed interest rate for this
type of loan, the present value of the note is P2,550,000 at the beginning of current year.

What amount of interest expense should be reported for current year?

a. 432,000
b. 350,000
c. 306,000
d. 0

Problem 7
On March 1, 2023, Alpha Company borrowed.P1,000,000 and signed a 2-year note bearing interest at
12% per annum compounded annually. Interest is payable in full at maturity on February 28, 2025.

What amount should be reported as accrued interest payable on December 31, 2024?
a. 100.000
b. 120.000
C. 232.000
d. 240.000

Problem 8
On September 30, 2024, World Company borrowed P1,000,000 on a 9% note payable. The entity paid
the first of four quarterly payments of P264,200 when due on December 31, 2024.

1. What amount should be reported as interest expense for 2024?

a. 90,000
b. 22,500
c. 67,500
d. 30,000

2. On December 31, 2024, what is the carrying amount of the note payable?
a. 758,300
b. 750,000
c. 825,800
d. 735,800
Problem 9
On January 1, 2024, Solemn Company sold land to Glory Company. There was no established market
price for the land. Glory Company gave Solemn Company a P2,400,000 noninterest bearing note payable
in three equal annual installments of P800,000 with the first payment due December 31, 2024. The note
has no ready market. The prevailing rate of interest for a note of this type is 10%. The present value of a
P2,400,000 note payable in three equal annual installments of P800,000 at a 10% rate of interest is
P1,989,600.

What is the carrying amount of the note payable on December 31, 2024?
a. 1,989,600
b. 2,126,400
c. 1,388,560
d. 2,400,000

Problem 10
Jason Company offered a contest in which the winner would receive P1,000,000 payable over twenty
years. On December 31, 2024, Jason Company announced the winner of the contest and signed a note
payable to the winner for P1,000,000 payable in P50,000 installments every January 31. On December
31, 2024, Jason Company purchased an annuity for P418,250 to provide the P950,000 prize remaining
after the first P50,000 installment which was paid on January 31, 2025.

1. On December 31, 2024, what amount should be reported as note payable-contest winner, net of
current portion?
a. 368,250
b. 418,250
c. 900,000
d. 950,000

2. What amount should be reported as contest prize expense for 2024?

a. 500,000
b. 418,250
c. 468,250
d. 0
Problem 11
Achilles Company reported the following liability balances on December 31,2023:
12% note payable issued on March 1, 2022, maturing on March 1, 2024
10% note payable issued on October 1, 2022, maturing October 1, 2024
The 2023 financial statements were issued on March 31, 2024.
On January 31, 2024, the entire P5,000,000 balance of the 12% note payable was refinanced through
issuance of a long-term obligation payable lump sum. On December 31, 2023, the entity has the right to
defer settlement of the 10% note payable for at least twelve months after December 31, 2023.

What amount of the notes payable should be classified as current on December 31, 2023?
a. 8,000,000
b. 5,000,000
c. 3,000,000
d. 0

Problem 12
Dean Company had a P2,000,000 note payable due June 30, 2025. On December 31, 2024, the entity
signed an agreement to borrow up to P2,000,000 to refinance the note payable on a long-term basis.
The financing agreement called for borrowing not to exceed 80% of the value of the collateral the entity
was providing. On December 31, 2024, the value of the collateral was P1,500,000.

On December 31, 2024, what amount of the note payable should be reported as current liability?
a. 2,000,000
b. 1,500,000
c. 800.000
d. 500,000

Problem 13
On December 31, 2024, Largo Company had a P750,000 note payable due July 31, 2025. The entity
planned to refinance the note by issuing long-term bonds. Because the entity temporarily had excess
cash, it prepaid P250.000 of the note on January 15, 2025. In February 2025, the entity completed a
P1,500,000 bond offering. On March 31, 2025, the entity issued the 2024 financial statements.

What amount of the note payable should be included in current liabilities on December 31.2024?
a. 750,000
b. 500,000
c. 250,000
d. 0
Problem 14
On January 1, 2024, Justine Company borrowed P2,000.000 on a 10%, five-year note payable. On
December 31, 2024. the fair value of the note is determined to be P1,900.000 based on market and
interest factors. The entity has elected the fair value option for reporting the financial liability.

1. What amount should be reported as interest expense for 2024?

a. 100,000
b. 190,000
c. 200,000
d. 150,000

2. What is the carrying amount of the note payable on December 31, 2024?
a. 2,000,000
b. 1,900,000
c. 950,000
d. 900,000

3. What amount should be reported as gain or loss in 2024 as a result of the fair value option?
a. 100,000 gain
b. 100,000 loss
c. 150,000 gain
d. 150,000 loss

4. Prepare journal entries.

Problem 15
On January 1, 2024, Jonathan Company borrowed P500,000 8%, interest-bearing note due in four years.
The present value of the note on January 1, 2024 was P367,500. The entity has elected the fair value
option for reporting the financial liability. On December 31, 2024, the fair value of the note is P408,150.

1. What is the carrying amount of the note payable on December 31, 2024?
a. 500,000
b. 367,500
c. 408,150
d. 460,000

2. What amount should be reported as interest expense for 2024?

a. 40,000
b. 29,400
c. 32,562
d. 20,000

3. What amount should be reported as net gain from change in fair value in 2024?
a. 132,500
b. 40.650
c. 91,850
d. 0

4. At what amount should the discount on note payable be presented on December 31, 2024?
a. 132.500
b. 103,100
c. 100.000
d. 0