Transcript Document

Long-term Debt:
Notes
I N T ERMEDIATE ACCOU N T I NG I I
CHA PT ER 1 4 ( PA RT 2 )
Accounting for Notes
Promissory Note – a formal document which specifies
an amount to be repaid at a specified future date and
usually involving the payment of interest.
Notes may be issued in exchange for cash or other assets
or services.
Notes are essentially accounted for in the same manner
as bonds.
Review of Vocabulary Relating to Notes
Principal - amount stated on the face of the note; amount borrowed and amount to be repaid.
Payee - person to whom the principal is owed.
Maker - person who signs the note and promises to pay the principal.
Interest - charge for the use of money over a period of time. Interest is generally stated as an annual percentage rate.
The maker of the note will have interest expense.
The payee of the note will have interest revenue.
Origination Date - the day the note was “made”.
Maturity Date - the date the principal and interest are due to the payee.
Maturity Value - the total amount due on the maturity date. Principal plus interest.
Note time - the period of time from the origination date to the maturity date. Time may be expressed in days,
months, or years.
Honoring a Note - paying the note in full on the maturity date.
Dishonoring a Note - not paying the note at the maturity date.
Example – Note Issued for Cash
On January 1, 2013, Skill Graphics, Inc., a product labeling and graphics firm, borrowed 700,000 cash from First
BancCorp and issued a 3-year, $700,000, 12% promissory note. Interest of $42,000 was payable semiannually on
June 30 and December 31. Payment in full is due December 31, 2016.
Date
2013
Jan 1
Account
Cash
Notes Payable
Debit
Credit
700,000
700,000
Example – Note Issued for Cash
On January 1, 2013, Skill Graphics, Inc., a product labeling and graphics firm, borrowed 700,000 cash from First
BancCorp and issued a 3-year, $700,000, 12% promissory note. Interest of $42,000 was payable semiannually on
June 30 and December 31. Payment in full is due December 31, 2016
Date
2013
Jan 1
Account
Cash
Debit
700,000
Notes Payable
Jun 30
Interest Expense
700,000
42,000
Cash
2016
Dec 31
Notes Payable
Cash
Credit
42,000
700,000
700,000
Example – Note Issued for Cash
On January 1, 2013, Skill Graphics, Inc., a product labeling and graphics firm, borrowed 700,000 cash from First
BancCorp and issued a 3-year, $700,000, 12% promissory note. Interest of $42,000 was payable semiannually on
June 30 and December 31. Payment in full is due December 31, 2016
Date
2013
Jan 1
Account
Cash
Debit
700,000
Notes Payable
Jun 30
Interest Expense
700,000
42,000
Cash
2016
Dec 31
Notes Payable
Cash
Credit
42,000
700,000
700,000
Installment Notes
Installment notes are paid in equal installments rather than by a
single amount at maturity.
The installment payment is calculated by dividing the amount of the
loan by the appropriate discount factor (based on number of periods
and the note’s interest rate) using the present value of an annuity
table.
Each payment of an installment note includes both an amount that
represents interest and an amount that represents a reduction of
principal.
At maturity, the note principal will be completely paid off.
To determine the total interest expense related to a note, add up all
interest payments.
Installment Note Amortization Schedule
It is helpful to calculate the amount of each payment to be applied to
principal and interest using an installment note amortization
schedule.
A
B
C
D
Payment
Cash
Interest
Principal
Ending
Date
Payment
Expense
Reduction
Principal Bal
Beg Prin
A = PVA of $1 @ Stated Interest Rate & Note Term
B = Previous Ending Principal (D) X Stated Interest Rate
C = Cash Payment (A) - Interest Expense (B)
D = Previous Ending Principal (D) - Principal Reduction ©
Long-term Debt:
Notes
I N T ERMEDIATE ACCOU N T I NG I I - CHA PT ER 1 4 ( PA RT 2 )
E N D OF P R ESENTATION