On April 1, 2022, Seamus Company purchased equipment by issuing a four-year, non-interest-bearing note with face amount of P1,600,000.The note is payable in annual installments of P400,000. The first installment is due on March 31, 2023. There was no equivalent cash pricefor the equipment and the note had no ready market. The prevailing rate of interest for the note of the same type is 9%.a. At what amount should the note be initially measured?b. Prepare the amortization table of the loan.c. Prepare the relevant journal entries for the years 2022 to 2026.d. What amount should be reported as current liability on December 31, 2023?e. What amount should be reported as non-current liability on December 31, 2023?
Question
On April 1, 2022, Seamus Company purchased equipment by issuing a four-year, non-interest-bearing note with face amount of P1,600,000.The note is payable in annual installments of P400,000. The first installment is due on March 31, 2023. There was no equivalent cash pricefor the equipment and the note had no ready market. The prevailing rate of interest for the note of the same type is 9%.a. At what amount should the note be initially measured?b. Prepare the amortization table of the loan.c. Prepare the relevant journal entries for the years 2022 to 2026.d. What amount should be reported as current liability on December 31, 2023?e. What amount should be reported as non-current liability on December 31, 2023?
Solution
a. The note should be initially measured at the present value of the future payments, discounted at the prevailing market rate of interest. The present value of an annuity of P400,000 at 9% for 4 years is P1,283,482. Therefore, the initial measurement of the note is P1,283,482.
b. The amortization table of the loan would look like this:
| Year | Opening Balance | Payment | Interest Expense (9%) | Closing Balance |
|---|---|---|---|---|
| 2022 | 1,283,482 | 0 | 115,513 | 1,398,995 |
| 2023 | 1,398,995 | 400,000 | 125,910 | 1,124,905 |
| 2024 | 1,124,905 | 400,000 | 101,241 | 826,146 |
| 2025 | 826,146 | 400,000 | 74,353 | 500,499 |
| 2026 | 500,499 | 400,000 | 45,045 | 145,544 |
c. The relevant journal entries would be:
2022:
- Debit: Equipment 1,283,482
- Credit: Notes Payable 1,283,482
2023:
- Debit: Interest Expense 115,513
- Debit: Notes Payable 400,000
- Credit: Cash 515,513
2024:
- Debit: Interest Expense 125,910
- Debit: Notes Payable 400,000
- Credit: Cash 525,910
2025:
- Debit: Interest Expense 101,241
- Debit: Notes Payable 400,000
- Credit: Cash 501,241
2026:
- Debit: Interest Expense 74,353
- Debit: Notes Payable 400,000
- Credit: Cash 474,353
d. The amount to be reported as current liability on December 31, 2023, is the next installment due, which is P400,000.
e. The amount to be reported as non-current liability on December 31, 2023, is the remaining balance of the note payable after the next installment, which is P724,905 (1,124,905 - 400,000).
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