Short-term notes
• LO13–2
The following selected transactions relate to liabilities of United Insulation Corporation. United’s fiscal year ends on December 31.
Required:
Prepare the appropriate
2018 | |
Jan. 13 | Negotiated a revolving credit agreement with Parish Bank that can be renewed annually upon bank approval. The amount available under the line of credit is $20 million at the bank’s prime rate. |
Feb. 1 | Arranged a three-month bank loan of $5 million with Parish Bank under the line of credit agreement. Interest at the prime rate of 10% was payable at maturity. |
May 1 | Paid the 10% note at maturity. |
Dec. 1 | Supported by the credit line, issued $10 million of commercial paper on a nine-month note. Interest was discounted at issuance at a 9% discount rate. |
31 | Recorded any necessary |
2019 | |
Sept. 1 | Paid the commercial paper at maturity. |
Long-term notes payable: Long-term notes payable represent a legal and written promise made by the business to pay a debt with interest over a period of more than a year. It is reported under the long-term liability section of the balance sheet.
Current portion of long-term notes payable: The principal amount of notes payable which would be paid within one year is called as current portion of long-term notes payable. The current portion of long-term notes payable is reported as a current liability.
To prepare: Necessary journal entries through the maturity of each liability.
Explanation of Solution
On January 13, 2016, there is no entry to be made because the loan is not made from the line of credit.
Record borrowing of cash on 10% notes payable.
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2016 | Cash | 5,000,000 | |||||
February | 1 | Short-Term Notes Payable | 5,000,000 | ||||
(To record the borrowed of cash on 10% notes payable.) |
Table (1)
- Cash is an asset and is increased by $5,000,000 due to borrowing of cash on 10% notes payable. Thus, debit cash with $5,000,000.
- Short-term notes payable is a liability and is increased by $5,000,000 as borrowed cash on notes payable. Thus, credit short-term notes payable with $5,000,000.
Record payment of 10% notes payable at maturity.
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2016 | Interest Expense | 125,000 | |||||
May | 1 | Short-Term Notes Payable | 5,000,000 | ||||
Cash | 5,125,000 | ||||||
(To record the payment of 10% notes payable at maturity.) |
- Interest expense is an expense and decreases the stockholders’ equity. Thus, debit Interest expense with $125,000.
- Short-term notes payable is a liability and is decreased by $5,000,000 due to payment made. Thus, debit short-term notes payable with $5,000,000.
- Cash is an asset and decreased due to payment made. Thus, credit Cash with $5,125,000.
Working notes:
Calculate interest expense for 3 months (February to April) on 10% note.
Record the payment of 10% notes payable at maturity.
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2016 | Cash | 9,325,000 | |||||
December | 1 | Discount on Notes Payable | 675,000 | ||||
Notes payable | 10,000,000 | ||||||
(To record the notes issuance at 9% discounted rate.) |
- Cash is an asset and is increased due to issuance of note. Thus, debit cash account with $9,325,000.
- Discount on notes payable is a contra liability and is increased. Thus, debit discount on notes payable account with $675,000.
- Notes payable is a liability and is increased by $10,000,000 as borrowed cash on notes payable. Thus, credit notes payable with $10,000,000.
Working note
Calculate the amount of discount on notes payable (commercial paper).
Record the interest expense for 1 month.
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2016 | |||||||
December | 1 | Interest expense | 75,000 | ||||
Discount on Notes Payable | 75,000 | ||||||
(To record the interest expense for 1 month.) |
- Interest expense is an expense and decreases the stockholders’ equity. Thus, debit Interest expense with $75,000
- Discount on notes payable is a contra liability and is decreased due to payment of interest expense. Thus, credit discount on notes payable account with $75,000.
Working note
Calculate the interest expense for 1 month (December) on commercial paper.
Record the interest expense for 8 months.
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2017 | |||||||
September | 1 | Interest expense | 600,000 | ||||
Discount on Notes Payable | 600,000 | ||||||
(To record the interest expense for 1 month.) |
- Interest expense is an expense and decreases the stockholders’ equity. Thus, debit Interest expense with $600,000
- Discount on notes payable is a contra liability and is decreased due to payment of interest expense. Thus, credit discount on notes payable account with $600,000.
Working note
Calculate the interest expense for 8 months (January to August) on commercial paper.
Record the payment of commercial paper at maturity.
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2017 | |||||||
September | 1 | Notes payable | 10,000,000 | ||||
Cash | 10,000,000 | ||||||
(To record payment of commercial paper at maturity.) |
- Notes payable is a liability and is decreased by $10,000,000 as payment is made at maturity. Thus, debit notes payable with $10,000,000.
- Cash is an asset and decreased due to payment made. Thus, credit cash accounts with $10,000,000
Want to see more full solutions like this?
Chapter 13 Solutions
GEN COMBO LOOSELEAF INTERMEDIATE ACCOUNTING; CONNECT ACCESS CARD
- Problem 14-5A (Algo) Installment notes LO C1 On January 1, 2021, Norwood borrows $540,000 cash from a bank by signing a five-year installment note bearing 7% interest. The note requires equal payments of $131,701 each year on December 31. Required: 1. Complete an amortization table for this installment note. 2. Prepare the journal entries in which Norwood records the following: (a) Norwood borrows $540,000 cash by signing a five-year, 7% installment note. (b) Record the first installment payment on December 31, 2021. (c) Record the second installment payment on December 31, 2022. Complete this question by entering your answers in the tabs below. Req 1 Req 2 Complete an amortization table for this installment note. Note: Round your intermediate calculations to the nearest dollar amount. Period Ending Date Beginning Balance Debit Interest Expense Debit Notes Payable Credit Cash Ending Balance 12/31/2021 12/31/2022 12/31/2023 12/31/2024 12/31/2025 Totalarrow_forwardSh.13. December 31. 2024 January 13 Negotiated a revolving credit agreement with Parish Bank that can be renewed annually upon bank approval. The amount available under the line of credit is $25.0 million at the bank’s prime rate. February 1 Arranged a three-month bank loan of $2.0 million with Parish Bank under the line of credit agreement. Interest at the prime rate of 13% was payable at maturity. May 1 Paid the 13% note at maturity. December 1 Supported by the credit line, issued $17.6 million of commercial paper on a nine-month note. Interest was discounted at issuance at a 12% discount rate. December 31 Recorded any necessary adjusting entry(s). 2025 September 1 Paid the commercial paper at maturity. Required: Prepare the appropriate journal entries through the maturity of each liabil ity.arrow_forwardSaved Exercise 9-4 Interest-bearlng notes payable with year-end adjustments LO P1 Keesha Co. borrows $235,000 cash on November 1 of the current year by signing a 90-day, 11%, $235,000 note. 1. On what date does this note mature? 2. & 3. What is the amount of interest expense in the current year and the following year from this note? 4. Prepare journal entries to record (a) issuance of the note, (b) accrual of interest on December 31, and (c) payment of the note at maturity. Complete this question by entering your answers in the tabs below. Reg 1 Reg 2 and 3 Req 4 What is the amount of interest expense in the current year and the following year from this note? (Use 360 days a year. Round final answers to the nearest whole dollar.) es Interest Total through maturity Interest Expense Current Year Expense Following Year Principal Rate (%) Time Total interestarrow_forward
- 41 On October 1 of the current year, an entity received a one-year note receivable bearing interest at the market rate. The face amount of the note receivable and the entire amount of the interest are due on September 30 of next year. The interest receivable on December 31 of the current year would consist of an amount representing Group of answer choices Three months of accrued interest income The excess on October 1 of the present value of the note receivable over its fact amount Nine months of accrued interest income Twelve months of accrued interest incomearrow_forwardProblem 10 On December 31, 2020, Olaer Company received two P5,000,000 notes receivable from customers in exchanged for consulting services rendered. On both notes, interest is calculated on the outstanding principal balance at the annual rate of 4% and payable at maturity. The note from Nazareno Corporation, made under customary trade terms, is due on October 1, 2021 and the note from Mudag Corporation is due on December 31, 2025. The market interest rate for similar notes on December 31, 2020 was 10%. The compound interest factors to convert future value into present value at 10% follow: present value of 1 due in nine months, 0.93, and present value of 1 due in five years, 0.62. 1. At what amounts should these two notes receivable be reported in Nazareno’s December 31, 2020 statement of financial position? 2. At what amounts should these two notes receivable be reported in Mudag’s December 31, 2020 statement of financial position?arrow_forward1 Saved Help Save & Ex On January 1, 2021, Tennessee Harvester Corporation issued debenture bonds that pay interest semiannually on June 30 and December 31. Portions of the bond amortization schedule appear below: Cash Effective Increase in Outstanding Payment Payment Interest Balance Balance 6,544,432 6,555,654 6,567,437 6,579,809 6,592,799 6,606,439 6,620,761 1 316, 0ее 316,000 316,000 316,000 316, е0е 316,000 327,222 327,783 328,372 328,990 329,640 330,322 11,222 11,783 12,372 12,990 13,640 14,322 3. 4 6 38 316,000 316,000 316,000 384,243 387,655 391,243 68,243 71,655 75,243 7,753,102 7,824,757 7,900,000 39 40 Required: 1. What is the face amount of the bonds? 2. What is the initial selling price of the bonds? 3. What is the term to maturity in years? 4. Interest is determined by what approach? 5. What is the stated annual interest rate? 6. What is the effective annual interest rate? 7. What is the total cash interest paid over the term to maturity? 8. What is the total effective…arrow_forward
- Problem 24Safari Bank granted a loan to a borrower on Jan. 1, 2020. The interest on the loan is 8% payable annually starting Dec. 31,2020. The loan matures in three years on Dec. 31,2022. Data related to the loan are:Principal amount 1,500,000Origination fees charged against the borrower 50,000Direct Origination cost incurred 130,150After consideration of the origination fees charged against the borrower and the direct origination cost incurred, the effective rate on the loan is 6%. Required:1. Prepare a table of amortization for the loan receivable.2. Prepare the journal entries for 2020, 2021 and 2022.arrow_forwardProblem 24Safari Bank granted a loan to a borrower on Jan. 1, 2020. The interest on the loan is 8% payable annually starting Dec. 31,2020. The loan matures in three years on Dec. 31,2022. Data related to the loan are:Principal amount 1,500,000Origination fees charged against the borrower 50,000Direct Origination cost incurred 130,150After consideration of the origination fees charged against the borrower and the direct origination cost incurred, the effective rate on the loan is 6%. Required:1. Compute the carrying amount of the loan receivable on December 31,2020, December 31,2021, December 31,2022.2. Prepare a table of amortization for the loan receivable.arrow_forwardProblem 5-8A (Algo) Record long-term notes receivable and interest revenue (LO5-7) On December 1, 2024, Liang Chemical provides services to a customer for $78,000. In payment for the services, the customer signs a three-year, 12% note. The face amount is due at the end of the third year, while annual interest is due each December 1. Required: 1. Record the acceptance of the note on December 1, 2024. 2. Record the adjusting entry for interest revenue on December 31 for 2024, 2025, and 2026, and the collection of annual interest on December 1, 2025 and 2026 3. Record the cash collection on December 1, 2027. Prepare the journal entries for the above transactions. (If no entry is required for a particular transaction/event, select "No Journal Entry Required" in the first account field.) View transaction list Journal entry worksheet 2 Record the acceptance of the note. Note: Enter debits before credits. Date December 01, 2024 Record entry View transaction list 4 Date December 01, 2026 5…arrow_forward
- Prepare the appropriate journal entries through the Problem 8-4 (IAA) Rose Company provided the following selected transactions related to liabilities: 2021 Feb. 1 Negotiated a revolving credit agreement with Second Bank which can be renewed annually upon bank approval. The amount available under the line of credit is P30,000,000 at the prime bank rate. April 1 Arranged a 3-month bank loan of P12,000,000 with Second Bank under the line of credit agreement. Interest at the prime rate of 8% was payable at maturity. July 1 Paid the 8% note at maturity. Nov. 1 Supported by the credit line, Rose Company issued P20,000,000 of commercial paper on a nine-month note. Interest was discounted at issuance at a 6% discount rate. Dec. 31 Recorded any necessary adjusting entry. 2022 Aug. 1 Paid the commercial paper at maturity. Required: maturity of each liability. 279arrow_forwardProblem 6 Luna Company discounted its own 2-year P500,000 12% interest bearing note at the bank onSeptember 1, 2020. The note was dated August 1, 2020. The discount rate was 15%. Preparethe journal entries relating to the said note starting September 1, 2020 until its payment.arrow_forwardQuestion 9 On 1 Dec. 2020, Segma Trading Co. borrowed $300,000 for 90 days at 5% by signing a note payable on the same amount Required: Select the right journal entry to record the payment of the note at its maturity date. O Dr. Note Payable $300,000 Dr. Interest Payable $2,500 Dr. Interest Expence $1,250 O Dr. Cash Cr. Cash $303,750 Cr. Note Payable $300,000 Cr. Interest Expence $2,500 Cr. Interest Payable $1,250 O Dr. Note Payable $300,000 Dr. Interest Expence $2,500 Dr. Interest Payable $1,250 Cr. Cash $303,750 O Dr. Note Payable $300,000 Dr. Interest Expence $3,750 Cr. Cash $303,750 $303,750arrow_forward
- Financial Accounting: The Impact on Decision Make...AccountingISBN:9781305654174Author:Gary A. Porter, Curtis L. NortonPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningCorporate Financial AccountingAccountingISBN:9781305653535Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning
- Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,