Section 2 Notes Payable

1. Chapter 26 $ Section 2 Notes Payable • What You’ll Learn • The differences between interest-bearing and noninterest-bearing notes. • How to record notes payable transactions. • How to calculate and record bank discounts. $ $ $

2. Section 2 Notes Payable (cont'd.) Chapter 26 $ Why It’s Important Many businesses issue and make payment on notes payable. $ • Key Terms • long-term liabilities • interest-bearing note payable • noninterest-bearing note payable • bank discount • proceeds • other expense $ $

3. Section 2 Notes Payable (cont'd.) Chapter 26 $ Interest-Bearing Notes Payable $ • A note payable is a promissory note issued to a creditor. • A note that requires the face value plus interest to be paid on the maturity date is called an interest-bearing note payable. $ $

4. Section 2 Notes Payable (cont'd.) Chapter 26 $ Recording the Issuance of an Interest-Bearing Note Payable $ Business Transaction On April 3, On Your Mark borrowed $7,000 from State Street Bank and issued a 90-day, 12% note payable to the bank, Note 6. $ ANALYSISIdentify 1. The accounts affected are Cash in Bank and Notes Payable. Classify 2.Cash in Bank is an asset account. Notes Payable is a liability account. $ + / – 3.Cash in Bank is increased by $7,000. Notes Payable is increased by $7,000.

5. Section 2 Notes Payable (cont'd.) Chapter 26 $ Recording the Issuance of an Interest-Bearing Note Payable (cont'd.) $ Business Transaction (cont'd.) On April 3, On Your Mark borrowed $7,000 from State Street Bank and issued a 90-day, 12% note payable to the bank, Note 6. $ DEBIT-CREDIT RULE4. Increases to asset accounts are recorded as debits. Debit Cash in Bank for $7,000. 5. Increases to liability accounts are recorded as credits. Credit Notes Payable for $7,000. $

6. Section 2 Notes Payable (cont'd.) Chapter 26 $ Recording the Issuance of an Interest-Bearing Note Payable (cont'd.) $ Business Transaction (cont'd.) On April 3, On Your Mark borrowed $7,000 from State Street Bank and issued a 90-day, 12% note payable to the bank, Note 6. $ T ACCOUNTS6. Cash in Notes Bank Payable $ Credit – Debit – Debit + 7,000 Credit + 7,000

7. Section 2 Notes Payable (cont'd.) Chapter 26 $ Recording the Issuance of an Interest-Bearing Note Payable (cont'd.) $ Business Transaction (cont'd.) On April 3, On Your Mark borrowed $7,000 from State Street Bank and issued a 90-day, 12% note payable to the bank, Note 6. $ JOURNAL ENTRY7. $

8. Section 2 Notes Payable (cont'd.) Chapter 26 $ Recording the Payment of an Interest-Bearing Note Payable Business Transaction $ On July 2, On Your Mark issued Check 3892 for $7,207.12 payable to State Street Bank in payment of the note payable issued April 3. The maturity value of the note is $7,207.12 ($7,000.00 principal + $207.12 interest). $ ANALYSISIdentify 1. The accounts affected are Notes Payable, Interest Expense, and Cash in Bank. Classify 2.Notes Payable is a liability account.Interest Expense is an expense account. Cash in Bank is an asset account. $ + / – 3.Notes Payable is decreased by $7,000. Interest Expense is increased by $207.12. Cash in Bank is decreased by $7,207.12.

9. Section 2 Notes Payable (cont'd.) Chapter 26 $ Recording the Payment of an Interest-Bearing Note Payable (cont'd.) Business Transaction (cont'd.) $ On July 2, On Your Mark issued Check 3892 for $7,207.12 payable to State Street Bank in payment of the note payable issued April 3. The maturity value of the note is $7,207.12 ($7,000.00 principal + $207.12 interest). $ DEBIT-CREDIT RULE4. Decreases to liability accounts are recorded as debits. Debit Notes Payable for $7,000. Increases to expense accounts are recorded as debits. Debit Interest Expense for $207.12. 5. Decreases to asset accounts are recorded as credits. Credit Cash in Bank for $7,207.12. $

10. Section 2 Notes Payable (cont'd.) Chapter 26 $ Recording the Payment of an Interest-Bearing Note Payable (cont'd.) Business Transaction (cont'd.) $ On July 2, On Your Mark issued Check 3892 for $7,207.12 payable to State Street Bank in payment of the note payable issued April 3. The maturity value of the note is $7,207.12 ($7,000.00 principal + $207.12 interest). $ Notes Payable Cash in Bank T ACCOUNTS6. Debit – 7,000 Credit – 7,207.12 Credit + Debit + $ Interest Expense Debit + 207.12 Credit –

11. Section 2 Notes Payable (cont'd.) Chapter 26 $ Recording the Payment of an Interest-Bearing Note Payable (cont'd.) $ Business Transaction (cont'd.) On July 2, On Your Mark issued Check 3892 for $7,207.12 payable to State Street Bank in payment of the note payable issued April 3. The maturity value of the note is $7,207.12 ($7,000.00 principal + $207.12 interest). $ JOURNAL ENTRY7. $

12. Section 2 Notes Payable (cont'd.) Chapter 26 $ Noninterest-Bearing Notes Payable • Sometimes a bank requires a borrower to pay the interest on a note in advance. • On the issue date, the bank deducts the interest from the face value of the note. • When interest is deducted in advance from the face value of the note, the note is called a noninterest-bearing note payable. $ $ $

13. Section 2 Notes Payable (cont'd.) Chapter 26 $ Calculating Noninterest-Bearing Notes Payable The first step is to calculate the bank discount, which is the interest on the note. $ $ Face Discount Bank Value  Rate  Time = Discount $ $1,500  .12  90/365 = $44.38

14. Section 2 Notes Payable (cont'd.) Chapter 26 $ Recording the Issuance of a Non-interest-Bearing Note Payable Business Transaction $ On June 12, On Your Mark signed a $1,500, 90-day noninterest-bearing note payable that First Federal Bank discounted at a rate of 12%, Note 13. ANALYSISIdentify 1. The accounts affected are Cash in Bank, Discount onNotes Payable, and Notes Payable. $ Classify 2.Cash in Bank is an asset account. Discount on Notes Payable is a contra liability account.Notes Payable is a liability account. $ + / – 3.Cash in Bank is increased by $1,455.62. Discount on Notes Payable is increased by $44.38. Notes Payable is increased by $1,500.00.

15. Section 2 Notes Payable (cont'd.) Chapter 26 $ Recording the Issuance of a Non-interest-Bearing Note Payable (cont'd.) $ Business Transaction (cont'd.) On June 12, On Your Mark signed a $1,500, 90-day noninterest-bearing note payable that First Federal Bank discounted at a rate of 12%, Note 13. $ DEBIT-CREDIT RULE4. Increases to asset accounts are recorded as debits. Debit Cash in Bank for $1,455.62. Increases to contra liability accounts are recorded as debits. Debit Discount on Notes Payable for $44.38. 5. Increases to liability accounts are recorded as credits. Credit Notes Payable for $1,500.00. $

16. Section 2 Notes Payable (cont'd.) Chapter 26 $ Recording the Issuance of a Non-interest-Bearing Note Payable (cont'd.) $ Business Transaction (cont'd.) On June 12, On Your Mark signed a $1,500, 90-day noninterest-bearing note payable that First Federal Bank discounted at a rate of 12%, Note 13. $ Cash in Bank Notes Payable T ACCOUNTS6. Debit + 1,455.62 Credit – Debit – Credit + 1,500.00 $ Discount on Notes Payable Debit + 44.38 Credit –

17. Section 2 Notes Payable (cont'd.) Chapter 26 $ Recording the Issuance of a Non-interest-Bearing Note Payable (cont'd.) $ Business Transaction (cont'd.) On June 12, On Your Mark signed a $1,500, 90-day noninterest-bearing note payable that First Federal Bank discounted at a rate of 12%, Note 13. $ JOURNAL ENTRY7. $

18. Section 2 Notes Payable (cont'd.) Chapter 26 $ Check Your Understanding $ How is the interest charge calculated for an interest-bearing note and a noninterest-bearing note? $ $