302371 INTEREST & NP 2G Flashcards
On September 30, Oregano Co. borrowed $500,000 on a 9% note payable. Oregano paid the first of four quarterly payments of $132,100 when due on December 30. In its December 31 balance sheet, what amount should Oregano report as note payable?
$367,900
$120,850
$379,150
$255,580
2G
Question #302371
Under the effective interest method, interest is recorded on the carrying value of the debt. Payments on the note payable, unless otherwise stated, reflect both principal and interest. The balance on December 31 should be $500,000 less the payment of principal made on December 30.
9/30 Balance $500,000
Payment $132,100
Interest* (11,250)
Principal reduction 120,850
12/31 Balance $379,150
========
* $500,000 × 9.0% × 3/12 months
On September 30, Oregano Co. borrowed $500,000 on a 9% note payable. Oregano paid the first of four quarterly payments of $132,100 when due on December 30. In its December 31 balance sheet, what amount should Oregano report as note payable?
$367,900
$120,850
$379,150
$255,580
2G
Question #302371
Interest
Interest is the charge for the use of money over time. It is the time value of money. Interest is the amount paid (or received) in excess of the amount borrowed (loaned). Interest is a financing expense (income) and is dependent on the interest rate, the principal amount, and the number of interest periods.
- Interest = Principal × Interest rate × Time periods
- Interest = Amount to be repaid - Amount received (loaned)
Simple interest: Interest is computed on the same principal amount each time period, regardless of the amount of interest accrued to date.
Compound interest: Interest is charged on the principal plus all interest previously accrued (interest computed on interest).
In macroeconomics, interest is a factor payment or factor income. It is a component of gross national product (GNP) (approximately 10%) and is used in the income approach to national income accounting. Interest includes payments received from banks on savings, from firms on loans, and other miscellaneous income.
Interest is analogous to wages, rent, and profit as a component of factor payments or factor income.
Notes Payable
A note payable is a contractual right to pay a certain sum of money on fixed or determinable dates at a fixed rate of interest. It is a formal and unconditional written agreement. Notes payable may be interest-bearing or noninterest-bearing; however, even “noninterest-bearing” notes have an interest element included in the face amount of the note.
2271.01
Current liabilities represent obligations whose liquidation is expected to require the use of current assets or the creation of other current liabilities, and include the following:
a. Obligations for items that have entered into the operating cycle
b. Collections received in advance of the delivery of goods or performance of services
c. Debts arising from operations directly related to the operating cycle (e.g., accruals for wages, salaries, commissions, rentals, royalties, and income and other taxes)
d. Other liabilities whose regular and ordinary liquidation is expected to occur within one year or less (e.g., dividends payable, warranty payable, interest payable)
Classification of Obligations That Are Callable by the Creditor
2271.02
Classification of Obligations That Are Callable by the Creditor
In addition to the liabilities defined above, current liabilities also include obligations that are due on demand or will be due on demand within one year (or operating cycle, if longer) from the balance sheet date. Current liabilities may also include long-term obligations that are or will be callable by the creditor because the debtor has violated a covenant in the debt agreement that either:
a. makes the obligation callable or
b. will make the obligation callable if the violation is not cured within a specified grace period.
If such a violation exists, the related debt must be classified as current unless either:
a. the creditor has waived or, subsequent to the violation, has lost the right to demand payment (e.g., because the violation has been cured) for more than one year (or operating cycle, if longer) from the balance sheet date or
b. it is probable that the violation will be cured within the specified grace period, if one exists.
2281.01
Notes payable are liabilities that are formally recognized by a written promissory note. These notes most often occur when the company cannot pay short-term accounts payable or obligations for items that have entered into the operating cycle. In those instances, the company may sign an interest-bearing note to defer payment for a short time. These notes payable are usually short-term liabilities.
2281.02
Short-term bank loan: A common way for a company to acquire temporary financing is to arrange a short-term bank loan. The company signs an interest-bearing promissory note.
Example: On February 1, 20X1, ABC Corp. borrows $500,000 for United Bank by signing a six-month 8% promissory note. Interest is due upon maturity of the note.
February 1, 20X1:
Cash 500,000
Notes payable 500,000
August 1, 20X1:
Interest expense ($500,000 x 8% x 6/12) 20,000
Notes payable 500,000
Cash 520,000
2281.03
Credit line: A common method of acquiring short-term notes payable is a credit line. A credit line allows a company to borrow up to an arranged limit without using formal loan paperwork.
