Learning Objectives LO 1 Identify available sources of

Learning Objectives LO 1 Identify available sources of debt financing. LO 2 Journalize transactions related to short-term debt financing. © 2014 Cengage Learning. All Rights Reserved.

Lesson 18 -1 Short-Term Debt Financing Options LO 1 ● The payment of an operating expense necessary to earn revenue is called a revenue expenditure. ● Obtaining capital by borrowing money for a period of time is called debt financing. ● A bank loan agreement that provides immediate short-term access to cash is called a line of credit, or credit line. ● The interest rate charged to a bank’s most creditworthy customers is called the prime interest rate. © 2014 Cengage Learning. All Rights Reserved. SLIDE 2

Lesson 18 -1 Drawing on a Line of Credit LO 2 Cash November 14. Drew $15, 800. 00 on its line of credit. Receipt No. 912. 15, 800. 00 Line of Credit 15, 800. 00 1 Date 2 Account Title 3 Receipt Number 4 Amount Borrowed © 2014 Cengage Learning. All Rights Reserved. 5 Cash Received SLIDE 3

Signing a Promissory Note for an Extension of Time GENERAL LEDGER Accounts Payable September 30. Sun Treasures signed a 60 -day, 12% note to Hass, Inc. , for an extension of time on its account payable, $4, 200. Memorandum No. 142. Lesson 18 -1 LO 2 4, 200. 00 Notes Payable 4, 200. 00 ACCOUNTS PAYABLE LEDGER Hass, Inc. 4, 200. 00 Bal. 1 Debit Accounts Payable and Vendor’s Account 2 4, 200. 00 Credit Notes Payable © 2014 Cengage Learning. All Rights Reserved. SLIDE 4

Paying Principal and Interest on a Promissory Note Lesson 18 -1 LO 2 ● Interest incurred on borrowed funds is called interest expense. ● Expenses that are not related to a business’s normal operations are called non-operating expenses. © 2014 Cengage Learning. All Rights Reserved. SLIDE 5

Lesson 18 -1 Paying Principal and Interest on a Promissory Notes Payable November 29. Paid cash for the maturity value of the August 30 note: principal, $4, 200. 00, plus interest, $84. 00; total, $4, 284. 00. Check No. 751. Principal × $4, 200. 00 × Annual × Interest Rate 12% 1 Account Title 2 Account Title × Time as Fraction of a Year 60/360 = = Interest for Fraction of Year $84. 00 LO 2 4, 200. 00 Interest Expense Nov. 29 84. 00 Cash Nov. 29 4, 284. 00 3 Principal Amount Interest Amount 4 © 2014 Cengage Learning. All Rights Reserved. Cash Paid 5 SLIDE 6

Lesson 18 -1 Audit Your Understanding 1. What information is specified in the loan agreement for a line of credit? ANSWER The loan agreement specifies the maximum amount that can be borrowed, the interest rate, term of the agreement, and repayment terms. © 2014 Cengage Learning. All Rights Reserved. SLIDE 7

Lesson 18 -1 Audit Your Understanding 2. On a line of credit, how would an interest rate of 3% over the prime rate be stated? ANSWER Prime plus 3% © 2014 Cengage Learning. All Rights Reserved. SLIDE 8

Lesson 18 -1 Audit Your Understanding 3. Is interest expense an operating or a nonoperating expense? ANSWER A non-operating expense © 2014 Cengage Learning. All Rights Reserved. SLIDE 9

Lesson 18 -1 Audit Your Understanding 4. Where is interest expense listed in a chart of accounts? ANSWER In a section titled Other Expenses © 2014 Cengage Learning. All Rights Reserved. SLIDE 10