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
Is a noninterest-bearing note issued at a premium or discount?
Discount
What is the amount of the periodic payment for an installment note issued at discount?
Face value divided by the annuity factor for the term of the note and the stated rate on the note
Define “discount on note” for a note exchanged for cash and other privileges.
The amount of noninterest revenue recognized over the term of the note
What is the effective interest method?
Periodic interest expense is computed by multiplying the yield rate at the date of issuance by the beginning net note liability (PV). The difference between cash interest paid and interest expense recognized at each payment date is the amortization discount or premium
What is the straight line method of amortization when dealing with Notes Payable?
Amortizes the premium or discount equally over each period.
What is the “Series of payments/receipts which occur at the beginning of a period?”
Annuity Due
What “Represents the debtor’s incremental borrowing rate?”
Imputed interest rate
What is “Maturity value of note and interest payments discounted to the present value?”
Fair Value of note
What results when a Note is issued at a discount?
Face rate of the note is less than yield rate
What results when a Note is issued at a premium?
Difference between the present value of the note and the cash exchanged when the market rate of interest is less than rate on the note
What is the simple interest method for notes payable?
Periodic interest is computed based on the principal balance only
