Notes Payable Flashcards
How do short term notes payable compare to A/P?
Have a term of at least 30 days and bear interest. They are reported at face value
What is a “stated rate” in regards to notes payable?
Rate stated in the note and determines the cash interest due on the note each period
What is a “yield rate” in regards to notes payable?
Also called effective or market rate. Is the rate on notes of similar risk and term. If note is to be reported at present value, the yield rate is used for that computation
Define “interest-bearing note payable.”
A note in which the interest element is explicitly stated
What is the total interest expense recognized on a noninterest-bearing note?
Total payments less amount borrowed
List the two different methods of amortizing a discount or premium on a note
- )Effective interest method;
2. ) Straight-line method
When is the straight-line method not allowed for notes payable accounting?
Installment notes, and when the yield and stated rates are materially different
What is the amount borrowed on an installment note issued at discount?
Product of the periodic payment and the annuity factor for the term of the note and the yield rate on the note.
What is the reported amount of a note calling for a face amount due at maturity, issued with an effective interest rate not equal to the stated rate?
Present value of remaining cash flows discounted at the effective rate.
What is the principal amount of a noninterest-bearing note?
Present value of the face amount discounted at the yield rate on the note.
What is the net note balance for a note issued at a discount?
Face value less unamortized discount
List the two different methods of recording a note for which a discount or premium is recorded.
- ) Gross method - Separates FV (Note Payable) and discount or premium in difference accounts
- ) Net method - Uses one combined net account (note payable) which is present value and net note liability under effective interest method.
What is the amount of interest recognized for a period on an installment note (one requiring equal periodic payments that include both principal and interest)?
Product of effective rate at date of issuing the note and the principal balance at the beginning of the period.
What causes a discount on a note?
When yield rate is greater than stated rate
What causes a premium on a note?
When yield rate is less than stated rate
