Notes Payable

Question 1

Questions:

Answer 1

• How to value
• How to accrue interest
• How much interest expense is recognized
• How to present on the financial statements
• You must know how to calculate present value

Question 2

What are the three types of note payables?

Answer 2

Installment note: Note has principle + Interest

Discounted Note: Debtor takes interest up front

No Stated Interest Rate: Interest needs to be imputed

All notes have a short-term and long-term component

Question 3

What are the payment structures of a note payable?

Answer 3

1) Interest only during the life of the note and repay the principle at the end
2) Include interest on unpaid balance and a reduction of the principle

Question 4

What are the two interest recognition methods?

Answer 4

Effective Method: The effective interest method recognizes interest based on the unpaid balance of the debt.

Straight-Line (SL) Method: The SL method is an alternative to effective interest method. It recognizes the same amount of interest and discount amortization each period.

SL is not appropriate for non-interest bearing note where there is a large difference between the yield rate and the stated rate.

Question 5

Types of questions to expect for this subject!

Answer 5

• You have to impute interest to determine the value of the asset purchased
• There is a partial year

Note: On notes that are less than one year, you do not need to impute interest!

Question 6

To value the note payable or the item purchased, which order should be followed?

Answer 6

1) The FV of the goods or services
2) FV of the Note
3) If FV of goods or note is unknown, impute use the prevailing rate for similar instruments