On January 1, 2022, Seamus Company purchased equipment by issuing a four-year, non-interest-bearing note with face amount ofP1,600,000. The note is payable in annual installments of P400,000. The first installment is due on December 31, 2022. There was noequivalent cash price for the equipment and the note had no ready market. The prevailing rate of interest for the note of the same type is9%.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 2025.d. What amount should be reported as current liability on December 31, 2023?e. What amount should be reported as noncurrent liability on December 31, 2023
Question
On January 1, 2022, Seamus Company purchased equipment by issuing a four-year, non-interest-bearing note with face amount ofP1,600,000. The note is payable in annual installments of P400,000. The first installment is due on December 31, 2022. There was noequivalent cash price for the equipment and the note had no ready market. The prevailing rate of interest for the note of the same type is9%.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 2025.d. What amount should be reported as current liability on December 31, 2023?e. What amount should be reported as noncurrent 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 P1,283,484. Therefore, the initial measurement of the note is P1,283,484.
b. The amortization table of the loan would look like this:
| Year | Opening Balance | Payment | Interest Expense (9%) | Closing Balance |
|---|---|---|---|---|
| 2022 | 1,283,484 | 400,000 | 115,514 | 999,998 |
| 2023 | 999,998 | 400,000 | 89,999 | 689,997 |
| 2024 | 689,997 | 400,000 | 62,100 | 352,097 |
| 2025 | 352,097 | 400,000 | 31,689 | -16,214 |
c. The relevant journal entries for the years 2022 to 2025 would be:
2022:
- Debit Equipment 1,283,484
- Credit Notes Payable 1,283,484
- Debit Interest Expense 115,514
- Credit Notes Payable 115,514
- Debit Notes Payable 400,000
- Credit Cash 400,000
2023:
- Debit Interest Expense 89,999
- Credit Notes Payable 89,999
- Debit Notes Payable 400,000
- Credit Cash 400,000
2024:
- Debit Interest Expense 62,100
- Credit Notes Payable 62,100
- Debit Notes Payable 400,000
- Credit Cash 400,000
2025:
- Debit Interest Expense 31,689
- Credit Notes Payable 31,689
- Debit Notes Payable 400,000
- Credit Cash 400,000
d. The amount reported as current liability on December 31, 2023, would be the payment due in 2024, which is P400,000.
e. The amount reported as noncurrent liability on December 31, 2023, would be the remaining balance of the note payable after the 2024 payment, which is P352,097.
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