Note Payable and Debt Restructuring

1. Note Payable is initially measured at fair value which is equal to the present value and
subsequently measured at amortized cost
2. When the note is issued solely for cash, the cash proceed is the present value using a discount
rate. Straight line method of depreciation is used. Using 12%, the entry is:
Cash 880,000
Discount on N/P 120,000
Note payable 1,000,000

3. If a promissory note is interest-bearing, the purchase price is the present value. Example: an
entity acquired equipment for 1,000,000 payable in 5 annual equal installments every dec.31 of
each year. Interest is 10percent on the unpaid balance.

1/1/11:
Equipment 1M
Note payable 1M
12/31 Interest Expense 100T
Note payable 200T
Cash 300T

12/31/12:
Interest Expense 80T
Note Payable 200T
Cash 280T

4. When a noninterest-bearing note is issued for a property with cash price, the cash price is
assumed to be the present value of the note issued. Entity acquired an equipment with a cash
price of 350T for 500T, 100T down and the balance payable in 4 equal annual installments:

1/1 Equipment 350T 12/31 NP 100T

Discount on N/P 150T Cash 100T
Cash 100T
N/P 400T Interest Exp 60T
Disc. On NP 60T
* Bond outstanding method is used to amortize discount.
* the cash paid is not added to the cost of equipment since the 350T cash value includes already
the 100T cash paid. So the 400T note payable applies to the 250T portion of the equipment.
Thus, 400-250=150T discount on note payable.
5. If there is no cash price in a noninterest bearing note, present value/cash price is determined
by multiplying the annual installment by the present value factor. Entity acquired an equipment
for 1M payable in 5 annual installments on every dec.31 of each year. Using 10percent
prevailing market interest, the entry is:

1/1 equipment 758,160 12/31 NP 200T

Discount on N/P 241,840 Cash 200T
 Note payable 1,000,000 Interest exp 75,816
Disc.on NP 75,816
*Effective interest method is used.