Note 4 - Notes Payable	3 Months Ended
Mar. 31, 2012
Notes
Note 4 - Notes Payable	NOTE 4 – NOTES PAYABLE $25,000 Convertible Note: The Company entered into a $25,000 note payable dated December 20, 2010. Interest accrued at the rate of ten percent (10%) per annum. The principal amount of the note and all accrued interest were payable on August 15, 2012. Interest expense for the three months ended March 31, 2011 (prior to the modification described below) totaled $466. On March 10, 2011, the Company executed an “On Demand Convertible Note” in the principal amount of $25,000 that replaced and superseded the terms of the $25,000 note payable that was outstanding as of December 31, 2010. The terms of the note stipulated that the entire principal and accrued interest shall be payable on September 10, 2012 with interest accruing at a 10% annual rate. The holder of the note payable was given the option to convert the $25,000 principal amount and the related accrued interest at any time prior to September 10, 2012 in exchange for 1,935,284 common shares. The note holder may convert less than 100% of the amount of the note and the related accrued interest and receive common shares on a pro-rata basis. Upon the conversion of the note, or a portion thereof, the note holder’s common stock ownership may not exceed 4.99% of the then outstanding common shares of the Company after giving effect to the shares issuable upon conversion. On September 10, 2012, the new note was modified to extend the maturity and note conversion deadline dates to September 10, 2015. The Company considers this new debt instrument to be substantially different from the replaced note payable pursuant to ASC 470 because its modification added a substantive conversion option whose exercise is considered to be at least reasonably possible. Accordingly, because substantially different terms exist, the old debt instrument is considered to be extinguished and the new debt instrument is valued at $105,279 for purposes of determining the loss on extinguishment of debt. A loss on extinguishment of debt of $79,738 resulting from the difference between the fair value of the new note and the carrying value of the old note at the time of the transaction is included in the consolidated statement of operations for the three months ended March 31, 2011. The new note fair value of $105,279 was determined by multiplying the number of convertible shares (1,935,284) by the estimated per share value ($0.0544) of the common stock on March 10, 2011. The $0.0544 valuation price used is the per share cash price (Level 1 input) obtained by the Company in its only equity offering prior to this transaction. The difference between the estimated fair value of the common stock issuable upon conversion of the new note and the face amount of the new note results in a beneficial conversion feature of $80,279 which was recorded as a reduction to the fair value of the new debt instrument and an increase to additional paid-in capital. Interest expense on the modified note for the quarters ended March 31, 2011 and 2012, totaled $151 and $623; respectively, all of which is accrued and unpaid. As of March 31, 2012, the note payable balance that is included in the consolidated balance sheet totals $27,657 which includes the $2,657 of accrued interest. $28,000 Convertible Note: On March 15, 2011, the Company executed an “On Demand Convertible Note” in the principal amount of $28,000 that replaces and supersedes a $28,156 vendor invoice that was accrued as of December 31, 2010. The note and any accrued interest was payable on September 15, 2012 with interest accruing at 10% per annum. The holder of the note had the option to convert the $28,000 principal amount and the related accrued interest at any time prior to September 15, 2012 in exchange for 473,204 common shares. The note holder may convert less than 100% of the amount of the note and the related accrued interest and receive common shares on a pro-rata basis. Upon conversion of the note, or a portion thereof, the note holder’s common stock ownership may not exceed 4.99% of the then outstanding common shares of the Company after giving effect to the shares issuable upon conversion. On September 15, 2012, the note was modified to extend the maturity and note conversion deadline dates to September 15, 2015. The Company considers this new debt instrument to be substantially different from the replaced note payable pursuant to ASC 470 because its modification added a substantive conversion option whose exercise is considered to be at least reasonably possible. Accordingly, because substantially different terms exist, the old debt instrument is considered to be extinguished and the new debt instrument is valued at $28,000 for purposes of determining the gain on extinguishment of debt. A gain on extinguishment of debt of $156 resulting from the difference between the fair value of the new note and the carrying value of the old note at the time of the transaction is included in the statement of operations for the three months ended March 31, 2011. The new note value of $28,000 was determined by the Company to be reasonable although the value of the convertible shares is less than the face value of the new note. The Company believes that because the note interest rate is representative of the rate the Company would have to pay for similarly termed debt instruments from third parties, the appropriate valuation is the $28,000 face amount of the note. This is a valuation using a Level 3 input and the market approach. Interest expense for the quarters ended March 31, 2011 and 2012, totaled $130 and $698, respectively; all of which is accrued and unpaid. As of December 31, 2011, the note payable balance that is included in the consolidated balance sheet totals $30,240 which includes the $2,240 of accrued interest. As of March 31, 2012, the note payable balance that is included in the consolidated balance sheet totals $30,938 which includes $2,938 of accrued interest.

Note 4 - Notes Payable

3 Months Ended

Mar. 31, 2012

NOTE 4 – NOTES PAYABLE

$25,000 Convertible Note:

The Company entered into a $25,000 note payable dated December 20, 2010. Interest accrued at the rate of ten percent (10%) per annum. The principal amount of the note and all accrued interest were payable on August 15, 2012. Interest expense for the three months ended March 31, 2011 (prior to the modification described below) totaled $466.

On March 10, 2011, the Company executed an “On Demand Convertible Note” in the principal amount of $25,000 that replaced and superseded the terms of the $25,000 note payable that was outstanding as of December 31, 2010. The terms of the note stipulated that the entire principal and accrued interest shall be payable on September 10, 2012 with interest accruing at a 10% annual rate. The holder of the note payable was given the option to convert the $25,000 principal amount and the related accrued interest at any time prior to September 10, 2012 in exchange for 1,935,284 common shares. The note holder may convert less than 100% of the amount of the note and the related accrued interest and receive common shares on a pro-rata basis. Upon the conversion of the note, or a portion thereof, the note holder’s common stock ownership may not exceed 4.99% of the then outstanding common shares of the Company after giving effect to the shares issuable upon conversion. On September 10, 2012, the new note was modified to extend the maturity and note conversion deadline dates to September 10, 2015.

The Company considers this new debt instrument to be substantially different from the replaced note payable pursuant to ASC 470 because its modification added a substantive conversion option whose exercise is considered to be at least reasonably possible. Accordingly, because substantially different terms exist, the old debt instrument is considered to be extinguished and the new debt instrument is valued at $105,279 for purposes of determining the loss on extinguishment of debt. A loss on extinguishment of debt of $79,738 resulting from the difference between the fair value of the new note and the carrying value of the old note at the time of the transaction is included in the consolidated statement of operations for the three months ended March 31, 2011. The new note fair value of $105,279 was determined by multiplying the number of convertible shares (1,935,284) by the estimated per share value ($0.0544) of the common stock on March 10, 2011. The $0.0544 valuation price used is the per share cash price (Level 1 input) obtained by the Company in its only equity offering prior to this transaction. The difference between the estimated fair value of the common stock issuable upon conversion of the new note and the face amount of the new note results in a beneficial conversion feature of $80,279 which was recorded as a reduction to the fair value of the new debt instrument and an increase to additional paid-in capital.

Interest expense on the modified note for the quarters ended March 31, 2011 and 2012, totaled $151 and $623; respectively, all of which is accrued and unpaid. As of March 31, 2012, the note payable balance that is included in the consolidated balance sheet totals $27,657 which includes the $2,657 of accrued interest.

$28,000 Convertible Note:

On March 15, 2011, the Company executed an “On Demand Convertible Note” in the principal amount of $28,000 that replaces and supersedes a $28,156 vendor invoice that was accrued as of December 31, 2010. The note and any accrued interest was payable on September 15, 2012 with interest accruing at 10% per annum. The holder of the note had the option to convert the $28,000 principal amount and the related accrued interest at any time prior to September 15, 2012 in exchange for 473,204 common shares. The note holder may convert less than 100% of the amount of the note and the related accrued interest and receive common shares on a pro-rata basis. Upon conversion of the note, or a portion thereof, the note holder’s common stock ownership may not exceed 4.99% of the then outstanding common shares of the Company after giving effect to the shares issuable upon conversion. On September 15, 2012, the note was modified to extend the maturity and note conversion deadline dates to September 15, 2015.

The Company considers this new debt instrument to be substantially different from the replaced note payable pursuant to ASC 470 because its modification added a substantive conversion option whose exercise is considered to be at least reasonably possible. Accordingly, because substantially different terms exist, the old debt instrument is considered to be extinguished and the new debt instrument is valued at $28,000 for purposes of determining the gain on extinguishment of debt. A gain on extinguishment of debt of $156 resulting from the difference between the fair value of the new note and the carrying value of the old note at the time of the transaction is included in the statement of operations for the three months ended March 31, 2011. The new note value of $28,000 was determined by the Company to be reasonable although the value of the convertible shares is less than the face value of the new note. The Company believes that because the note interest rate is representative of the rate the Company would have to pay for similarly termed debt instruments from third parties, the appropriate valuation is the $28,000 face amount of the note. This is a valuation using a Level 3 input and the market approach.

Interest expense for the quarters ended March 31, 2011 and 2012, totaled $130 and $698, respectively; all of which is accrued and unpaid. As of December 31, 2011, the note payable balance that is included in the consolidated balance sheet totals $30,240 which includes the $2,240 of accrued interest. As of March 31, 2012, the note payable balance that is included in the consolidated balance sheet totals $30,938 which includes $2,938 of accrued interest.

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

+ References+ Details

PanAm Terra, Inc. 10-Q