4.

2 IVideo and Discussion of

Accounts Payable
 

In computing for the amounts that shall be reported in the statement of

financial position as part of Current Liabilities, one must consider the
following in accounting for Accounts Payable
 

 Gross Method or Net Method of recording ( Net method records A/P

net of cash discounts)
 Freight terms (FOB Shipping Point/Destination, Freight Prepaid or
Freight Collect)Assume that on Oct 1, 2020, Nathaniel Corporation
purchased merchandise from Dahlia Company with list price of P
100,000, trade discounts of P 10%; terms FOB shipping point, 5/10,
n/30. Dahlia paid the freight charges of  P 5,000. Nathaniel uses the
periodic inventory systems. See suggested journal entries below.
Once the correct entry/ies have been posted, the resulting balance of
AP shall be reflected in the statement of financial position net of
Allowance for Purchase Discounts (if there are any).
4.3 Exercises on Present Value
Computations
Dear CPAs October 2023 (100%), 
 

Choose two (2) questions from the list below. One (1) from Problem A and
one (1) from Problem B. Show your answer and solutions.  Indicate the
number you wish to respond to.  DO NOT ROUND OFF your PRESENT
VALUE FACTORS but ROUND OFF your FINAL ANSWER to TWO
DECIMAL PLACES.
 

Problem A: Get the present values of the Note (LUMP SUM). Assume that
the note is dated January 1st.
1. )   Non-Interest bearing Note P 1,000,000 payable after one year. Market
rate is 10%
2. )   Non-Interest bearing Note P 1,000,000 payable after two  years.
Market rate is 10%
3. )   5% Interest bearing Note P 1,000,000 payable after one year. Market
rate is 10%
4.)    5% Interest bearing Note P 1,000,000 payable after two  years. Market
rate is 10%
5.)    15% Interest bearing Note P 1,000,000 payable after one year. Market
rate is 10%
6.)   15% Interest bearing Note P 1,000,000 payable after two  years.
Market rate is 10%
 

Problem B: Get the present values of the Note. Assume that the date of the
Note is January 1
1. )   Non-Interest bearing Note P 1,000,000 payable in two equal
installments after six months and after one year. Market rate is 10%
2. )   1 years Non-Interest bearing Note P 1,000,000 payable in two equal
installments every June 30 and December 31.  Market rate is 10%
3. )   1year , 5% Interest bearing Note P 1,000,000 payable 4 equal
installments . Principal and interest is payable every March 31, June 30,
September 30 and December 31. Market rate is 10%
4.)    One year 15% Interest bearing Note P 1,000,000 . Principal and
interest is payable on June 30 and December 31.  Market rate is 10%
6.)   One year 15% Interest bearing Note P 1,000,000 payable in four equal
installments. Principal and interest is payable on March 31,  June 30,
September 30 and December 31.  Market rate is 10%
 

Happy answering!
You may post a comment on your fellow CPA/CISA  in the making's
responses.
 
 1. )   Non-Interest bearing Note P 1,000,000 payable after one year. Market
rate is 10%
PV = FV / (1+ %)^-n
PV = 1000000 / 1.10^-1
PV = 909, 090.91
 

1. )   Non-Interest bearing Note P 1,000,000 payable in two equal

installments after six months and after one year. Market rate is 10%
PV = FV / (1+i)^-n/i
PV = 1000000 x (1+.05)^-2/.05
PV = 929,705.22

2. Non-Interest bearing Note P 1,000,000 payable after two years. Market rate is 10%
PV = FV (1+i)^-n
PV = 1,000,000 (1+0.10)^-2
PV = 1,000,000 x (1.10)^-2
PV = 826,446.28
PROBLEM B
2. 1 years Non-Interest bearing Note P 1,000,000 payable in two equal installments
every June 30 and December 31.  Market rate is 10%
500,000 x (1.05^-1) = 476,190.48
500,000 x (1.05^-2) = 453,514.74
PV = 929,705.22

6.)   15% Interest bearing Note P 1,000,000 payable after two years. Market rate is 10%
Answer:
Principal
P1,000,000 x (1.10^-2)  = P826,446.28
Interest
((P1,000,000 x .15)x2)x(1.10^2) = 247,933.88
Carrying Value, January 1 = P1,074,380.17

3. )   5% Interest bearing Note P 1,000,000 payable after one year. Market rate is
10%

Principal P 1,000,000

Stated Interest          50,000

Total future cash outflow     1,050,000

PV factor at 10% for 1 period          0.9091

Present value of the note P 954,545.45

4. )    One year 15% Interest bearing Note P 1,000,000 . Principal and interest is
payable on June 30 and December 31.  Market rate is 10%
 

Present Value of Principal  

   (1,000,000 x 1.05^-1) 952,380.95

Present Value of Interest 714,428.57

   (1,000,000 x 7.5% x 1.05^-1)  

Total Present Value 1,023,809.52

\
4.4 Current Liabilities
CURRENT LIABILITIES, PROVISIONS and
CONTINGENCIES
A liability is a present obligation of the enterprise arising from past events, the
settlement of which is expected to result in an outflow from the enterprise
 
of resources embodying economic benefits (IASB Framework).
4.5 Video on Notes Payable
4.6 Notes Payable : Market Rate
Equals Stated Rate
Example: On September 1, 20X8, ABC Company purchased a delivery truck
costing P 2,500,000 and issued a 10% note payable on August 31, 20x9 .
The prevailing market interest rate for this type of note is 10%.
Required: 1. Journal entries on September 1, 20x8, December 31, 20x8 and
August 31 20x9
                        2. Current Liabilities that shall be reported in the Statement of
Financial Position in 20x8
                        3. Expenses that should be reported in the Statement of
Financial Performance in connection with the transaction.
4.7 Video on Calculating Present
Value: Single Payment
Calculating Present Value: Single Payment
 

The video below shows how to calculate the present value of of payments
discounted at the effective interest.In this video the cash flow shall be
received/ paid after two years . Note that the computation in this video
would provide the same results with this formula
PV=FV of Cash Flow x (1+i)^-1 . To know more, click the picture below.

4.8 Notes Payable : Market Rate is

More than the Stated Rate
Example: On September 1, 20X8, ABC Company purchased a delivery truck
costing P 2,500,000 and issued a 10% note payable on August 31, 20x9 .
The prevailing market interest rate for this type of note is 15%.
Required: 1. Journal entries on September 1, 20x8, December 31, 20x8 and
August 31 20x9
                        2. Current Liabilities that shall be reported in the Statement of
Financial Position in 20x8
                        3. Expenses that should be reported in the Statement of
Financial Performance in connection with the transaction.
 
4.9 Notes Payable : Market Rate is
Less Than the Stated Rate
Example: On September 1, 20X8, ABC Company purchased a delivery truck
costing P 2,500,000 and issued a 15% note payable on August 31, 20x9 .
The prevailing market interest rate for this type of note is 8%.
Required: 1. Journal entries on September 1, 20x8, December 31, 20x8 and
August 31 20x9
                        2. Current Liabilities that shall be reported in the Statement of
Financial Position in 20x8
                        3. Expenses that should be reported in the Statement of
Financial Performance in connection with the transaction.
4.10 Other Current Liabilities
PREMIUMS, LOYALTY AWARDS,
WARRANTIES, SUBSCRIPTIONS
 

Sample problems below show how these items of current liabilities are
accounted for.
CASE -PREMIUMS
Problem 1
Aman Company embarked on a promotional program whereby a “T” shirt
costing P150 each is given away for every 100 bottle crowns returned plus
P50. Amana Company estimates that only 40% of the bottle crowns in the
hands of consumers will be presented for redemption. The following
information is available to you:
4.11 Discussion: Reflective Questions
Dear CPAs October 2023 (100%), 
 

Choose one (1) questions among the six (6) questions below and share your
thoughts. Indicate the number you wish to respond to. Answer briefly. 
 

1. Differentiate Stated or Nominal Interest Rate and the Effective Interest

Rate. Give proforma journal entries.
2. Describe briefly the serial bond, term bond, registered bond, coupon or
bearer bond, callable bond, debenture bonds and secured bonds.
Serial Bond is a bond issue that is structured so that a portion of the
outstanding bonds mature at regular intervals until all of the bonds have
matured. Term Bond are bonds from a single issue that all mature on the
same date. Registered Bond is a debt instrument whose bondholder's
information is kept on record with the issuing party. Coupon or Bearer Bond
is a physical certificate with coupons attached that are used to redeem the
interest payments. Callable Bond is a bond that the issuer may redeem
before it reaches the stated maturity date. Debenture Bond refers to debt
issued by a company that is not secured by collateral. And Secured Bond is
a type of investment in debt that is secured by a specific asset owned by
the issuer.

3. In your own understanding, how to we compute for the present value

when cash flows are (a) Single Payment  (b) Ordinary Annuity (c) Annuity
Due
4. What are the proforma journal entries when bonds are issued at face
value?
Debit Cash, Credit Bonds Payable

5. What are the proforma journal entries when bonds are issued at less than
face value? How does amortization of discount affect the nominal interest
and the carrying value of the bond?

6. What are the proforma journal entries when bonds are issued at more
than face value? How does amortization of premium affect the nominal
interest and the carrying value of the bond? What are contingent assets and
when do we recognize them in the financial statements?
 

4.12 Video on Debt and Equity

Financing
DEBT vs EQUITY FINANCING
 

MAKE your dreams happen. 

The video below shows the difference between equity and debt financing..
Click the picture below.
 

4.13 Exercises: Calculating Present Values

Principal 5,000,000 x 1.12^-5 = 2,837,134.28
Interest 5,000,000 x .12 x (1-(1.12^-5))/.12 = 2,162,865.72
Present Value = 5,000,000

4.14 Calculating Present Value

(Annuity)
CALCULATING PRESENT VALUE (ANNUITY) or Received more than one
Cash Flows at the end of the Year and the amounts are equal.
 

MAKE your dreams happen. 

The video below shows how to calculate present values for an annuity. Click
the picture below. Note that the formula illustrated here will provide you
with the same results as:
 

Present Value of an Ordinary Annuity = (1-(1+i)^-1)

4.15 Bonds Payable Issued at a
Discount
Amortization Table (Effective Interest Method) 
MAKE your dreams happen. 
The video below shows an example of an amortization table using the
effective interest method. Click the picture below.
Present Value of an Ordinary Annuity = (1-(1+i)^-1)
                                                                                                     i
 

Present Value of a SIngle Payment= (1+i)^-1)

4.16 Bonds Payable Issued at a
Premium
Present Value of an Ordinary Annuity = (1-(1+i)^-1)
                                                                                                     i
 

Present Value of a SIngle Payment= (1+i)^-1)

                                             i
Step 2. Amortization Table
4.17 Discussion: Troubled Debt
Restructuring
Answer the problem below. Provide journal entries.

 On December 31, 2024, Ana Company is experiencing extreme financial

pressure and is in default in meeting interest payment on its long-term note of
P 6,000,000 due on December 31, 2025. The 10% interest rate is payable
every December 31.
In an agreement with the creditor, Ana Company obtained the following changes in
terms of the note:
 
The accrued interest on December 31, 2024 is forgiven
The principal amount is reduced to P 3,000,000
The new interest rate is 8%.
The new maturity date is December 31, 2030.
 
At the time of restructuring, the market interest rate was 10%. At what amount would
Ana report as gain on debt restructuring?

Principal = 3,000,000 x (1.10)^-6

Principal = 1,693,421.79

Interest = 3,000,000 x .08 x (1-(1+.10)^-6/.10)

Interest = 240,000 x 4.355260699
Interest = 1,045,262.57

Present Value of Note Payable = 1,693,421.79 + 1,045,262.57

Present Value of Note Payable = 2,738,684.36
Less: Face Value 3,000,000
Discount on Notes Payable = 261,315.64
Note Payable, 12/31/2024 6,000,000
Add: Accrued Interest Payable 600,000
Carrying Amount of Liability 6,600,000
Less: PV of Note Payable (2,738,684.36)
Gain 3,861,315.64
Journal Entry
Note Payable, 12/31/2024 6,000,000
Accrued Interest Payable 600,000
Discount on Notes Payable 261,315.64
Note Payable New 3,000,000
Gain 3,861,315.64
4.18 Discussion: Bonds with Equity
Characteristics and with Conversion Feature
Choose one (1) question among the three (3) questions below and share
your thoughts. Indicate the number you wish to respond to. Answer briefly. 
 

1. Briefly explain Bonds with equity characteristics. How do we account for

bonds with non-detachable share warrants issued? (Market value of the
bonds with warrants is known). Prepare proforma journal entries.
2. Briefly explain Bonds with equity characteristics. How do we account for
bonds with non-detachable share warrants issued? (Market value of the
bonds with warrants is not known). Prepare proforma journal entries.
3. Briefly explain Bonds with convertible features. How do we account for
bonds  which can be converted to shares? Prepare proforma journal entries.