Notes Payable

Question 1

Installment Notes: KEYS

Answer 1

? - Assume Stated is Market unless told otherwise - ?

Balance will decrease with each Payment by the PRINCIPLE amount only

Each Payment is Principle and Interest

Installment Payment is calculated as Annuity using STATED RATE

Interest PAYABLE is off Stated, but Interest EXPENSE uses Market Rate

Market Rate is on DAY of issuance, not some more recent Market Rate as time goes by

Merchandise (Inventory) and the Note itself should be carried at PV using MARKET Rate

ACCRUED INTEREST PAYABLE: needs to be calculated based on months elapse since last PAYMENT

Note Payable

Question 2

Loan Origination Fee

Answer 2

Reduces Proceeds making Effective Rate Higher than stated (like a discount)

Question 3

Effective Rate ??

Answer 3

NEEDS REVIEW

Interest Expense over Proceeds ??

Total Interest vs for YEar and Opening Balance etc

Question 4

Non-Interest Bearing Note

Answer 4

Borrow $4000 (Proceeds) to pay back $5000 so $1000 in interest or 25%

A noninterest-bearing note actually causes interest to be paid by the maker. The term noninterest-bearing means that the note carries no stated rate of interest. The face value of the note includes interest however, and exceeds the principal amount of the note (the amount borrowed).

Question 5

Contest Prize

Answer 5

Recognized at PV of Future Cash Flows just as if using proceeds to buy equipment (Dr Expense, Cr Note vs Dr Equipment and Cr Note)

Question 6

Accrued Interest Compounded

Answer 6

If Interest not pay until Maturity of the note, the interest is compounded onto the original balance and following year will be on a HIGHER balance of original plus accrued interest from the year before.

Question 7

Annuities

Answer 7

DUE is at beginning (DUE NOW)
ORDINARY is at End (ordinarily pay after)

Need to pay attention to the problem:
1. If 8 payments and 1 made already on Dec 30th and they ask for Note Balance at Dec 31, then only 7 payments left to calc the Note

2. Need to see when next payment is due after the B/S date to see if should use ORDINARY or DUE (in advance); i.e. Does it occur immediately after the B/S Date or a year after..
3. Use Timelines

Question 8

Value of Inventory using Note

Answer 8

Recorded at PV using Market Rate, but need to know impact if incorrectly recorded at Stated Rate and if that will overstate or understate Inventory and COGS.

If Higher Rate used the discount will be greater so the value will be less (understated).

Face usually equals Maturity Value.

Question 9

Bankruptcy Claims

Answer 9

Secured before unsecured and a liquidation value is paid at liquidation of the firm so acts as secured debt even if on an unsecured loan. Remaining balance then paid as unsecured (% of remaining total; i.e. 40 cents on the dollar.).

Question 10

Discounting Note to Bank

Answer 10

NEEDS REVIEW

Discount % is annual % so must adjust total $ discount if not a full year outstanding?

Question 11

Direct way to price inventory

Answer 11

When there is no direct way to price the inventory (and that is rare), then you have to use a market rate of interest to determine the financing. Fluer used something very different from the market. Now, we have to take the PV to determine the value of the inventory and the financing.

Therefor this is an exception to just recording the Note at Face since due in 4 months.