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Note Payable

The document outlines various scenarios related to note payables, detailing calculations for accrued interest, interest expense, and current liabilities for different entities. It includes multiple-choice questions to assess understanding of financial accounting principles regarding notes payable and their reporting. The scenarios cover aspects such as interest rates, payment schedules, and refinancing agreements.

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9 views

Note Payable

The document outlines various scenarios related to note payables, detailing calculations for accrued interest, interest expense, and current liabilities for different entities. It includes multiple-choice questions to assess understanding of financial accounting principles regarding notes payable and their reporting. The scenarios cover aspects such as interest rates, payment schedules, and refinancing agreements.

Uploaded by

af7240618
Copyright
© © All Rights Reserved
Available Formats
Download as PDF, TXT or read online on Scribd
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CPA REVIEW SCHOOL OF THE PHILIPPINES

Manila
FINANCIAL ACCOUNTING AND REPORTING VALIX/VALIX/ESCALA/SANTOS/DELA CRUZ
BATCH 92 OCTOBER 2022 CPALE
NOTE PAYABLE
1. On January 1, 2022, an entity reported a P7,200,000 note payable to a bank. The note is dated October
1, 2021, bears interest at 15% and is payable in three equal annual principal payments of P2,400,000. On
this date, the bank’s prime rate was 12%. The first annual payment for interest and principal was made
on October 1, 2022.
1. On December 31, 2022, what amount should be reported as accrued interest payable?
a. 540,000
b. 180,000
c. 396,000
d. 144,000
2. What amount should be reported as interest expense for 2022?
a. 720,000
b. 726,000
c. 990,000
d. 810,000
2. An entity frequently borrowed from the bank in order to maintain sufficient operating cash. The following
loans were at a 12% interest rate with interest payable at maturity. The entity repaid each loan on scheduled
maturity date.
Date loan Amount Maturity date Term of loan
November 1, 2021 500,000 October 31, 2022 1 year
February 1, 2022 1,500,000 July 31, 2022 6 months
May 1, 2022 3,000,000 January 31, 2023 9 months
The entity recorded interest expense when the loans are repaid. As a result, interest expense of P150,000
was recorded in 2022. If no correction is made, by what amount would interest expense be understated
for 2022?
a. 380,000
b. 230,000
c. 240,000
d. 350,000
3. On March 1, 2022, an entity 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, 2023. What amount
should be reported as accrued interest payable on December 31, 2022?
a. 100,000
b. 120,000
c. 232,000
d. 240,000
4. On January 1, 2022, 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, 2022. The note
had no ready market. The prevailing 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 in
P1,992,000.
1. What amount should be reported as interest expense for 2022?
a. 240,000
b. 199,200
c. 160,000
d. 0
2. What is the carrying amount of the note payable on December 31, 2022?
a. 1,992,000
b. 1,192,000
c. 1,391,200
d. 1,600,000

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5. An entity reported the following liabilities on December 31, 2022:


Accounts payable and accrued interest 1,000,000
12% note payable issued November 1, 2021 maturing July 1, 2023 2,000,000
10% debentures payable, next annual principal installment of P500,000 due
February 1, 2023 7,000,000
On December 31, 2022, the entity consummated a noncancelable agreement with the lender to refinance
the 12% note payable on a long-term basis. The December 31, 2022 financial statements were issued on
March 31, 2023.
On December 31, 2022, what total amount should be reported as current liabilities?
a. 3,500,000
b. 3,000,000
c. 1,500,000
d. 2,500,000
6. On December 31, 2022, an entity had a P4,500,000 note payable due July 31, 2023. The entity planned
to refinance the note by issuing long-term bonds. Because the entity temporarily had excess cash, it
prepaid P1,500,000 of the note on January 15, 2023. In February 2023, the entity completed a P8,000,000
bond offering. On March 31, 2023, the entity issued the 2022 financial statements.
What amount of the note payable should be included in current liability on December 31, 2022?
a. 4,500,000
b. 3,000,000
c 1,500,000
d. 0
7. An entity had a P5,000,000 note payable due June 30, 2023. On December 31, 2022, the entity signed an
agreement to borrow up to P5,000,000 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, 2022, the value of the collateral was P4,000,000.
On December 31, 2022, what amount of the note payable should be reported as current liability?
a. 5,000,000
b. 4,000,000
c. 1,800,000
d. 3,200,000
8. On January 1, 2022, an entity borrowed P5,000,000 on a 10% three-year interest-bearing note. The net
proceeds from the borrowing amounted to P5,000,000. Interest is payable annually every December 31.
The entity elected the fair value option in measuring the note payable. On December 31, 2022 and 2023,
the risk factors indicated that the rate of interest applicable to the note was 8% and 12% respectively.
PV of 1 8% 4 periods 0.735
PV of an ordinary annuity of 1 8% 4 periods 3.312
PV of 1 12% 3 periods 0.712
PV of an ordinary annuity of 1 12% 3 periods 2.402
1. What amount should be reported as gain or loss from change in fair value for 2022?
a. 400,000 gain
b. 400,000 loss
c. 331,000 loss
d. 331,000 gain
2. What amount should be reported as gain or loss from change in fair value for 2023?
a. 570,000 gain
b. 570,000 loss
c. 239,000 gain
d. 239,000 loss

End

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