Section 2 Notes Payable What Youll Learn The

Section 2 Notes Payable What You’ll Learn = The differences between interestbearing and noninterest-bearing notes. = How to record notes payable transactions. = How to calculate and record bank discounts.

Section 2 Notes Payable (cont'd. ) Why It’s Important Many businesses issue and make payment on notes payable. Key Terms = = = long-term liabilities interest-bearing note payable noninterest-bearing note payable bank discount proceeds other expense

Section 2 Notes Payable (cont'd. ) Interest-Bearing Notes Payable = A note payable is a promissory note issued to a creditor. = A note that requires the face value plus interest to be paid on the maturity date is called an interestbearing note payable.

Section 2 Notes Payable (cont'd. ) Recording the Issuance of an Interest-Bearing Note Payable Business Transaction On April 3, On Your Mark borrowed $7, 000 from State Street Bank and issued a 90 -day, 12% note payable to the bank, Note 6. ANALYSIS Identify Classify +/– 1. The accounts affected are Cash in Bank and Notes Payable. 2. Cash in Bank is an asset account. Notes Payable is a liability account. 3. Cash in Bank is increased by $7, 000. Notes Payable is increased by $7, 000.

Section 2 Notes Payable (cont'd. ) Recording the Issuance of an Interest-Bearing Note Payable (cont'd. ) Business Transaction (cont'd. ) On April 3, On Your Mark borrowed $7, 000 from State Street Bank and issued a 90 -day, 12% note payable to the bank, Note 6. DEBIT-CREDIT RULE 4. Increases to asset accounts are recorded as debits. Debit Cash in Bank for $7, 000. 5. Increases to liability accounts are recorded as credits. Credit Notes Payable for $7, 000.

Section 2 Notes Payable (cont'd. ) Recording the Issuance of an Interest-Bearing Note Payable (cont'd. ) Business Transaction (cont'd. ) On April 3, On Your Mark borrowed $7, 000 from State Street Bank and issued a 90 -day, 12% note payable to the bank, Note 6. T ACCOUNTS 6. Cash in Bank Notes Payable Debit Credit + – – + 7, 000

Section 2 Notes Payable (cont'd. ) Recording the Issuance of an Interest-Bearing Note Payable (cont'd. ) Business Transaction (cont'd. ) On April 3, On Your Mark borrowed $7, 000 from State Street Bank and issued a 90 -day, 12% note payable to the bank, Note 6. JOURNAL ENTRY 7.

Section 2 Notes Payable (cont'd. ) Recording the Payment of an Interest-Bearing Note Payable Business Transaction On July 2, On Your Mark issued Check 3892 for $7, 207. 12 payable to State Street Bank in payment of the note payable issued April 3. The maturity value of the note is $7, 207. 12 ($7, 000. 00 principal + $207. 12 interest). ANALYSIS Identify 1. The accounts affected are Notes Payable, Interest Expense, and Cash in Bank. Classify 2. Notes Payable is a liability account. Interest Expense is an expense account. Cash in Bank is an asset account. + / – 3. Notes Payable is decreased by $7, 000. Interest Expense is increased by $207. 12. Cash in Bank is decreased by $7, 207. 12.

Section 2 Notes Payable (cont'd. ) Recording the Payment of an Interest-Bearing Note Payable (cont'd. ) Business Transaction (cont'd. ) On July 2, On Your Mark issued Check 3892 for $7, 207. 12 payable to State Street Bank in payment of the note payable issued April 3. The maturity value of the note is $7, 207. 12 ($7, 000. 00 principal + $207. 12 interest). DEBIT-CREDIT RULE 4. Decreases to liability accounts are recorded as debits. Debit Notes Payable for $7, 000. Increases to expense accounts are recorded as debits. Debit Interest Expense for $207. 12. 5. Decreases to asset accounts are recorded as credits. Credit Cash in Bank for $7, 207. 12.

Section 2 Notes Payable (cont'd. ) Recording the Payment of an Interest-Bearing Note Payable (cont'd. ) Business Transaction (cont'd. ) On July 2, On Your Mark issued Check 3892 for $7, 207. 12 payable to State Street Bank in payment of the note payable issued April 3. The maturity value of the note is $7, 207. 12 ($7, 000. 00 principal + $207. 12 interest). T ACCOUNTS 6. Notes Payable Cash in Bank Debit Credit – + + – 7, 000 7, 207. 12 Interest Expense Debit Credit + – 207. 12

Section 2 Notes Payable (cont'd. ) Recording the Payment of an Interest-Bearing Note Payable (cont'd. ) Business Transaction (cont'd. ) On July 2, On Your Mark issued Check 3892 for $7, 207. 12 payable to State Street Bank in payment of the note payable issued April 3. The maturity value of the note is $7, 207. 12 ($7, 000. 00 principal + $207. 12 interest). JOURNAL ENTRY 7.

Section 2 Notes Payable (cont'd. ) Noninterest-Bearing Notes Payable = Sometimes a bank requires a borrower to pay the interest on a note in advance. = On the issue date, the bank deducts the interest from the face value of the note. = When interest is deducted in advance from the face value of the note, the note is called a noninterest-bearing note payable.

Section 2 Notes Payable (cont'd. ) Calculating Noninterest-Bearing Notes Payable The first step is to calculate the bank discount, which is the interest on the note. Face Value Discount Rate $1, 500 . 12 Time Bank = Discount 90/365 = $44. 38

Section 2 Notes Payable (cont'd. ) Recording the Issuance of a Noninterest-Bearing Note Payable Business Transaction On June 12, On Your Mark signed a $1, 500, 90 -day noninterest-bearing note payable that First Federal Bank discounted at a rate of 12%, Note 13. ANALYSIS Identify 1. The accounts affected are Cash in Bank, Discount on Notes Payable, and Notes Payable. Classify 2. Cash in Bank is an asset account. Discount on Notes Payable is a contra liability account. Notes Payable is a liability account. + / – 3. Cash in Bank is increased by $1, 455. 62. Discount on Notes Payable is increased by $44. 38. Notes Payable is increased by $1, 500.

Section 2 Notes Payable (cont'd. ) Recording the Issuance of a Noninterest-Bearing Note Payable (cont'd. ) Business Transaction (cont'd. ) On June 12, On Your Mark signed a $1, 500, 90 -day noninterest-bearing note payable that First Federal Bank discounted at a rate of 12%, Note 13. DEBIT-CREDIT RULE 4. Increases to asset accounts are recorded as debits. Debit Cash in Bank for $1, 455. 62. Increases to contra liability accounts are recorded as debits. Debit Discount on Notes Payable for $44. 38. 5. Increases to liability accounts are recorded as credits. Credit Notes Payable for $1, 500.

Section 2 Notes Payable (cont'd. ) Recording the Issuance of a Noninterest-Bearing Note Payable (cont'd. ) Business Transaction (cont'd. ) On June 12, On Your Mark signed a $1, 500, 90 -day noninterest-bearing note payable that First Federal Bank discounted at a rate of 12%, Note 13. T ACCOUNTS 6. Cash in Bank Notes Payable Debit Credit + – – + 1, 455. 62 1, 500. 00 Discount on Notes Payable Debit Credit + – 44. 38

Section 2 Notes Payable (cont'd. ) Recording the Issuance of a Noninterest-Bearing Note Payable (cont'd. ) Business Transaction (cont'd. ) On June 12, On Your Mark signed a $1, 500, 90 -day noninterest-bearing note payable that First Federal Bank discounted at a rate of 12%, Note 13. JOURNAL ENTRY 7.

Section 2 Notes Payable (cont'd. ) Check Your Understanding How is the interest charge calculated for an interest-bearing note and a noninterest-bearing note?