Debt Flashcards
How should a discount on a note payable be accounted for?
As a direct reduction from the face of the note amount.
What is the exception for interest being imputed when a unusually low interest rate exists?
When the note is made for the normal course of business and it is for less than one year.
If each payment due on a note consists of principal AND interest, how do you account for the interest payable?
It is the payment at the end of the year less the interest payment.
Then you take the principal and reduce from prior calculation.
How are noninterest bearing notes reported?
At the present value of their future cash flows. So if a annuity is purchased for the remaining principal that is due, you report the annuity amount as the note payable.
If the note is sold at a discount with recourse, what contigent liability should be shown?
Full note. This note is not discounted since it is sold with recourse
If a note payable has a maturity date of less than 1 year, how is it reported?
As the face amount. It is not reported at present value if it is less than 1 year.
How is interest earned on accounts held in escrow treated when determining the balance?
As an addition to the liability in the BASE formula.
Example of discounting a note.
$100,000, 8 month noninterest bearing note sold on July 1, Discounted at 10% on September 1.
$100,000
less: $5,000, 5%(10% x 6/12)
$95,000
How is imputed interest on a nonbearing note accounted for?
As interest expense.
Remember to look at the dates when its asking you for interest payable.
If its in the next year, you need to deduct principal paid and then calculate interest.
Accured interest for the end of the balance sheet date, say December 31.
Its just for the months OF THE CURRENT YEAR. DO NOT THINK A CURRENT LIABILITY FOR ACCURED INTEREST MEANS YOU REPORT THE ENTIRE THING JUST FOR THE DAMN YEAR!!
Remember that all interest is annualized, even if it is just a six month loan repayable that year.
