Module 8 - THEORIES

Module 8: Note Payable
PROBLEM SOLVING
1. On January 1, 2022, Box Company Borrowed P5,000,000 on a 10% 5-year interest

bearing note. The net proceeds from the borrowing amounted to 2,550,000. Interest is
payable annually every December 31.
The entity elected the fair value option. On December 31, 2022, the bonds were quoted
at 95. What amount should be reported as gain or loss from change in fair value for
2022?
a. 2,450,000 gain
b. 2,450,000 loss
c. 2,550,000 gain
d. 2,550,000 loss
2. Balloon Company frequently borrowed from the bank in order to maintain sufficient operating
cash. The loans were at a 12% interest rate, with interest payable at maturity.
The entity recorded interest expenses when the loans were repaid. As a result, interest expense
of 85,000 was recorded in 2023. The entity repaid each loan on the scheduled maturity date.
Date Amount Maturity Term

11/01/2022 400,000 10/31/2023 1 year
02/01/2023 1,000,000 07/31/2023 6 months
05/01/2023 700,000 01/31/2024 9 months
If no correction is made, by what amount would interest expenses for 2023 be understated?
a. 56,000
b. 92,000
c. 85,000
d. 71,000
3. Mirror Company bought a new machine and agreed to pay an equal annual installment of
700,000 at the end of each of the next five years. The prevailing interest rate for this type of
transaction is 12%.
The present value of an ordinary annuity of 1 at 12% for five periods is 3.60. The future amount
of an ordinary annuity of 1 at 12% for five periods is 6.35. The present value of 1 at 12% for five
periods is 0.567. What amount should be reported as note payable if financial statements were
prepared today?
a. 4,445,000
b. 2,520,000
c. 396,900
d. 4,000,000
4. Using the problem above, What amount should be reported as interest expense for the first
year?
a. 167,000
b. 396,900
c. 302,400
d. 457,200
5. On September 1, 2022, Flower Company issued a note payable in the amount of 1,800,000,
bearing interest at 12%, and payable in three equal annual principal payments of P600,000. On
this date, the prime rate was 11%.
The first interest and principal payment was made on September 1, 2023. On December 31,
2023, What amount should be reported as accrued interest payable?
a. 44,000
b. 48,000
c. 66,000
d. 72,000
6. On January 1, 2023, Mariano Company borrowed 3,000,000 on a 10% five-year interest

bearing note. On December 31, 2023, the fair value of the note was determined to be
P2,500,000.
The entity irrevocably elected the fair value option in measuring the note payable. What amount
should be reported as interest expense for 2023?
a. 300,000
b. 150,000
c. 200,000
d. 190,500
7. Using Problem number 6, What is the carrying amount of the note payable on December 31,
2023?
a. 3,000,000
b. 2,000,000
c. 1,900,000
d. 2,500,000
8. Using Problem number 6, What amount should be reported as gain or l;oss from change in
fair value of the note payable for 2023?
a. 500,000 gain
b. 500,000 loss
c. 450,000 gain
d. 450,000 loss
9. On September 30, 2024, Money Company borrowed 900,000 on a 9% note payable. The
entity paid the first of four quarterly payments of 195,300 when due on December 21, 2024.
What amount should be reported as interest expense for 2024?
a. 23,250
b. 19,500
c. 20,250
d. 25,000
10. Based on problem number 9, On December 31, 2024, what is the carrying amount of the
Note Payable?
a. 704,700
b. 740,500
c. 785,900
d. 825,700
11. On January 1, 2023, Frame Company sold land to Picture Company. There was no
established market price for the land.
Picture Company gave Frame Company a 2,400,000 non-interest bearing note payable in three
equal annual installments of 800,000 with the first payment due December 31, 2023.
The note had no ready market. The prevailing rate of interest for a note of this type is 10%.
The present value of a 2,400,000 note payable in three equal annual installments of P800,000
at a 10% rate of interest is 1,992,000
a. 1,325,900
b. 2,400,000
c. 1,600,000
d. 1,391,200
11. On January 1, 2023, Aica Company reported a note payable of P2,000,000. The note
payable is dated October 1, 2022, bears interest at 15%, and is payable in three equal annual
payments of P500,000. The first interest and principal payment was made on October 1, 2023.
What amount should be reported as interest expense for 2023?
a. 135,000
b. 30,000
c. 800,000
d. 165,000
12. On March 1, 2022, Tissue Company borrowed P5,000,000 and signed a 2 year note
payable bearing interest at 12% per annum compounded annually. Interest is payable in full at
maturity on February 28, 2024.
What amount should be reported as accrued interest payable on December 31, 2023?
a. 1,160,000
b. 5,000,000
c. 600,000
d. 2,160,000
13. At the beginning of the current year, Book Company borrowed P4,000,000 from a major
evidenced by a non-interest bearing note payable due in three years. The entity agreed to
supply the customer’s inventory needs for the loan period at an amount lower than market
value. At the 12% imputed interest rate for this type of loan, the present value of the note is
P3,450,000 at the date of issuance. What amount of interest expense should be reported for the
current year?
a. 3,450,000
b. 414,000
c. 4,000,000
d. 480,000
14. On December 31, 2023, Coffee Company purchased a machine from Vase Company in
exchange for a non-interest bearing note payable requiring eight payments of 100,000.
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%
PV of an ordinary annuity of at 11% for 8 periods 5.146

PV of an annuity of 1 in advance at 11% for 8 periods 5.712
On December 31, 2023, what is the carrying amount of the note payable?
a. 571,200
b. 100,000
c. 471,200
d. 514,600
15. Wallet Company reported a 10% note payable of P2,400,000 on June 30, 2023. The note is
dated October 1, 2021 and payable in three equal annual payments of P 800,000 plus interest.
The first interest and principal payment was made on October 1, 2022.
What amount should be reported as accrued interest payable for this note, on June 30,2023?
a. 270,000
b. 1,600,000
c. 800,000
d. 180,000

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Module 8: Note Payable

1. On January 1, 2022, Box Company Borrowed P5,000,000 on a 10% 5-year interest

Date Amount Maturity Term

6. On January 1, 2023, Mariano Company borrowed 3,000,000 on a 10% five-year interest

PV of an ordinary annuity of at 11% for 8 periods 5.146

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