Chapter 9.M, Problem 7E

To determine

Notes payable:

Notes payable is basically a promissory note wherein the amount mentioned has to be paid. The issuer or the borrower has to interest as well and the issuing company will have an interest factor. It is a general ledger liability account.

In other words, the borrower is bound to pay a certain amount under this agreement to the lender within a stipulated time period along with an interest.

To calculate:

The notes payable on the basis of $6\%$ on June $30$ , September $30$ and December $31$ along with the interest expense for each calendar quarter.

Answer to Problem 7E

There is no ending balance at the end of each quarter.

Explanation of Solution

Note: Variables rates for the next quarters

  $\begin{array}{l}5.8\%-\text{March }31\hfill \\ 5.5\%-\text{ June }30\hfill \\ 5.6\%-\text{ September }30\hfill \\ 5.4\%-\text{ December }31\hfill \end{array}$

Schedule A: Amortisation of note payable without swap

Quarter	Payment	Interest	Principal	Balance
Beginning				$10,000,000$
March    $31$	$\begin{array}{l}2,090,893\hfill \end{array}$	$\begin{array}{l}1,50,000\hfill \end{array}$	$1,940,893$	$8,059,107$
June    $30$	$\begin{array}{l}2,090,893\hfill \end{array}$	$120,887$	$1,970,007$	$6,089,100$
September    $30$	$\begin{array}{l}2,090,893\hfill \end{array}$	$91,337$	$1,999,557$	$4,089,543$
December    $31$	$\begin{array}{l}2,090,893\hfill \end{array}$	$\begin{array}{l}61,343\hfill \end{array}$	$2,029,550$	$2,059,993$
March    $31$	$\begin{array}{l}2,090,893\hfill \end{array}$	$30,900$	$\begin{array}{l}2,059,993\hfill \end{array}$	$0$
Total	$10,454,466$	$454,466$	$10,000,000$

Note:

  $\text{Principal}=\text{payment}-\text{interest}$

Schedule B: quarterly variable versus fixed rate difference

Quarter	Variable rate	Fixed rate	Quarterly interest		Quarterly difference
			Variable rate (A)	Fixed rate (B)	$\left(A\right)-\left(B\right)$
June    $30$	$5.8\%$	$6\%$	$\begin{array}{l}145,000\hfill \end{array}$	$150,000$	$\left(5,000\right)$
September    $30$	$5.5\%$    $$	$6\%$	$137,500$	$150,000$	$\left(12,500\right)$
December    $31$	$5.6\%$	$6\%$	$140,000$	$150,000$	$\left(10,000\right)$
March    $31$	$5.4\%$	$6\%$	$135,000$	$150,000$	$\left(15,000\right)$
Total		$42,500$

Variables rates for the next quarters:

  $\begin{array}{l}5.8\%-\text{March }31\hfill \\ 5.5\%-\text{ June }30\hfill \\ 5.6\%-\text{ September }30\hfill \\ 5.4\%-\text{ December }31\hfill \end{array}$

Summary of entries debit (credit) over the life of not payable as follows:

Particulars	Cash	Notes Payable	Interest	Gain(loss) on debt	Swap asset	Gain(loss)on swap
Beginning balance	$10,000,000$	$\left(10,000,000\right)$
March    $31$	$\left(2,090,893\right)$	$1,940,893$	$150,000$
June    $30$ Change in value of swap Quarterly difference	$\left(2,090,893\right)$    $5,000$	$\begin{array}{l}1,970,007\\ \left(14,954\right)\end{array}$	$120,887$    $\left(5,000\right)$	$14,954$	$14,954$	$\left(14,954\right)$
September    $30$ Quarterly difference	$\begin{array}{l}\left(2,090,893\right)\\ 12,500\end{array}$	$\begin{array}{l}1,999,557\\ 8,917\end{array}$	$\begin{array}{l}91,337\\ \left(12,500\right)\end{array}$	$\left(8,917\right)$	$\left(8,917\right)$	$\left(8,917\right)$
December    $31$ Quarterly difference	$\begin{array}{l}\left(2,090,893\right)\\ 10,000\end{array}$	$\begin{array}{l}2,029,550\\ 2,988\\ (10,000)\end{array}$	$61,343$	$(2,988)$	$(2,988)$	$2,988$
March    $31$ Quarterly difference	$\begin{array}{l}\left(2,090,893\right)\\ 15,000\end{array}$	$\begin{array}{l}2,059,993\\ 3,049\end{array}$	$\begin{array}{l}30,900\\ \left(15,000\right)\end{array}$	$\left(3,049\right)$	$\left(3,049\right)$	$\left(3,049\right)$
Ending balance	$\left(411,966\right)$	$0$	$411,966$	$0$	$0$	$0$

CONCLUSION

There is no ending balance at the end of each quarter.