Georgia CTAE Resource Network Instructional Resources Office Written
- Slides: 13
Georgia CTAE Resource Network Instructional Resources Office Written by: Dr. Marilynn K. Skinner May 2009 Accounting for Liabilities
Current Liabilities n Debts of a company that are paid with current assets. Debt that is paid off within a year
Notes Payable Debts of a company that result in the company signing a negotiable loan instrument (note) Notes may be: Interest Bearing – Interest accrues as the note matures. Non-Interest Bearing – the interest is included in the face value (principal) of the note
Interest Bearing Note Example: On August 20 Spectrum Electronics purchased $1, 000 in merchandise on account from Jetto Enterprises, the terms were n/30. On September 19, Spectrum could not pay the amount and asked Jetto to accept a note payable on the account Date Description Debit 8/20 Accts. Pay/Jetto 1, 000 Notes Payable Credit 1, 000
Paying an Interest Bearing Note Payable On December 18 Spectrum paid the principal plus interest back to Jetto Date Description Debit 12/18 Note Payable 1, 000. 00 Interest Expense* Cash • *Principal X Interest Rate X TIME = Interest 1, 000. 00 X. 10 X 90/365 = 24. 66 Credit 24. 66 1024. 66
Adjusting for Accrued Interest Example: On December 22 Spectrum issued a note payable to Jetto for $3000. The terms of the note were 30 days at 11%. Complete the entry for accrued interest at December 31. Date Description Debit 12/31 Interest Expense 8. 14 Interest Payable • Principal 3000 X X Credit 8. 14 Interest Rate X Time = Interest. 11 X 9/365 = 8. 14
Adjusting for Accrued Interest Example: On December 22 Spectrum issued a note payable to Jetto for $3000. The terms of the note were 30 days at 11%. Complete the entry for the payment of the note on January 21. Date Description Debit 1/21 Note Payable 3000. 00 Interest Payable 8. 14 Interest Expense 18. 98 Cash in Bank • Principal 3000 X X Credit 3027. 12 Interest Rate X Time = Interest. 11 X 21/365 = 18. 98
Noninterest Bearing Note Payable Also called a discounted note payable n Bank requires borrower to pay interest at time loan is issued n Borrower receives less than face value of note at time of the loan. n
Noninterest Bearing Note Payable Example On February 15 Spectrum issued a $4, 200, 60 -day noninterest bearing note, discounted at 12%. What are the proceeds from the note? Face value X Discount Rate X Time = Bank Discount 4, 200. 00 X. 12 X 60/365 = 82. 85 Face Value 4, 200. 00 - Bank Discount = Proceeds 82. 85 = 4, 117. 15
Recording a Noninterest Bearing Note On February 15 Spectrum issued a $4, 200, 60 day noninterest bearing note, discounted at 12%. What is the entry to record the note? Date 2/15 Description Cash in Bank Discount on Notes Payable Debit Credit 4117. 15 82. 58 4200. 00
Recording Payment of a Noninterest Bearing Note On April 16 Spectrum paid the $4, 200, 60 -day noninterest bearing note, discounted at 12%. What is the entry to record the note? Date 4/16 Description Interest Expense Notes Payable Discount on note payable Cash in Bank Debit Credit 82. 85 4200. 00
Adjusting for Accrued Interest for a Noninterest Bearing Note On December 16 Spectrum issued a $2, 500, 45 -day noninterest bearing note, discounted at 12%. What is the entry to record the accrual of interest on December 31? Date Description Debit 12/31 Interest Expense 12. 33 Discount on Notes Payable Credit 12. 33 Principal X Interest Rate X Time = Interest 2, 500 X. 12 X 15/365 = 12. 33
Adjusting for Accrued Interest for a Noninterest Bearing Note On December 16 Spectrum issued a $2, 500, 45 -day noninterest bearing note, discounted at 12%. What is the entry to record the payment of the note on January 30? Date Description Debit 1/30 Interest Expense 24. 66 Notes Payable 2500. 00 Credit Discount on Notes Payable 24. 66 Cash in Bank 2500. 00
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