Ch. 14.3 (Long-Term Notes Payable)

Question 1

Long-term Notes Payable

Answer 1

Long-term notes are similar in substance to bonds in that both have fixed maturity dates and carry either a stated or implicit interest rate. However, notes do not trade as readily as bonds in the organized public securities markets.

Noncorporate and small corporate enterprises issue notes as their long-term instruments. Larger corporations issue both long-term notes and bonds.

Accounting for notes and bonds is quite similar.

Question 2

zero-interest bearing notes

Answer 2

The implicit interest rate is the rate that equates the cash received with the amounts to be paid in the future.

Question 3

Notes Issued for Property, Goods, or Services

Answer 3

When exchanging the debt instrument (NP) for property, goods, or services in a bargained transaction entered into at arm’s length, the stated interest rate is presumed to be fair unless:

1. No interest rate is stated, or
2. The stated interest rate is unreasonable, or
3. The stated face amount of the debt instrument is materially different from the current cash sales price for the same or similar items or from the current fair value of the debt instrument.

Question 4

If no stated rate of interest for Notes Issued for Property, Goods, or Services, then

Answer 4

The amount of interest is the difference between the face amount of the note and the fair value of the property.

Question 5

Imputation

Answer 5

Process of interest-rate approximation.

The prevailing rates for similar instruments of issuers with similar credit ratings affect the choice of a rate. Other factors such as restrictive covenants, collateral, payment schedule, and the existing prime interest rate also play a part.

Imputed interest rate.

Question 6

Mortgage Note Payable

Answer 6

A promissory note secured by a document called a mortgage that pledges title to property as security for the loan.