Notes and loans: answer key
Answer key: the accepted entries with the amounts of the worksheet, and why.
Convention: United States (US textbooks)
Accepting a customer’s note for an open account
A customer owes the company $4,500.00 for goods sold on account last month. To get more time, the customer signs a 90-day promissory note for the full amount.
Assumptions: Interest on the note is recorded when it is earned, not today.
Account Debit Credit Notes Receivable $4,500.00 Accounts Receivable $4,500.00 Why
The customer still owes $4,500.00, but the claim is now a written note: Notes Receivable replaces Accounts Receivable. No revenue arises; the sale was recorded last month.
Collecting a note with interest
Today a customer pays in cash its 4-month, 9% note for $9,600.00, together with the interest due.
Assumptions: The note was received and is collected in the same year: no interest has been recorded on it before. Interest is computed in whole months: principal × rate × months / 12.
Account Debit Credit Cash $9,888.00 Notes Receivable $9,600.00 Interest Revenue $288.00 Why
Interest is $9,600.00 × 9% × 4/12 = $288.00, so the customer pays $9,888.00. Cash is debited for $9,888.00, Notes Receivable credited for the principal and Interest Revenue for the interest.
Giving a supplier a note for an open account
The company owes a supplier $6,800.00 for goods bought on account last month. Instead of paying now, it signs a 60-day promissory note for the full amount.
Assumptions: Interest on the note is recorded when it is incurred, not today.
Account Debit Credit Accounts Payable $6,800.00 Notes Payable $6,800.00 Why
The company still owes $6,800.00, but now under a written note: Accounts Payable is debited and Notes Payable credited. No expense or inventory arises; the purchase was recorded last month.
Paying a note with interest at maturity
At maturity the company pays by check its 6-month, 5% note payable for $14,400.00, together with the interest due.
Assumptions: The note was issued and is paid in the same year: no interest has been recorded on it before. Interest is computed in whole months: principal × rate × months / 12.
Account Debit Credit Notes Payable $14,400.00 Interest Expense $360.00 Cash $14,760.00 Why
Interest is $14,400.00 × 5% × 6/12 = $360.00, so the company pays $14,760.00. Notes Payable is debited for the principal, Interest Expense for the interest, and Cash credited for $14,760.00.
A customer dishonors a note
A customer’s 3-month, 10% note for $8,400.00 falls due today, and the customer dishonors it (does not pay).
Assumptions: The company still expects to collect, so it charges the customer the principal and the interest due. No interest has been recorded on this note before. Interest is computed in whole months: principal × rate × months / 12.
Account Debit Credit Accounts Receivable $8,610.00 Notes Receivable $8,400.00 Interest Revenue $210.00 Why
Interest to maturity is $8,400.00 × 10% × 3/12 = $210.00; it has been earned even though it was not paid. The note is removed and the customer owes $8,610.00 on account: debit Accounts Receivable $8,610.00, credit Notes Receivable $8,400.00 and Interest Revenue $210.00.
Receiving a bank loan net of an arrangement fee
The company borrows $60,000.00 from its bank on a three-year note, repayable in full at maturity. The bank deducts a loan fee of $900.00 and deposits the rest in the company’s checking account today.
Assumptions: Debt issuance costs are deducted from the carrying amount of the note (ASC 835-30): the note is recorded at the net amount received.
Account Debit Credit Cash $59,100.00 Notes Payable $59,100.00 Why
The company receives $60,000.00 − $900.00 = $59,100.00. With the issuance costs deducted from the note, Cash and Notes Payable both show $59,100.00; the fee is spread over the life of the note as extra interest expense.
Paying a loan installment: splitting interest and principal
The company pays the monthly installment of $1,500.00 on its bank loan (a note payable) by check. Before this payment the outstanding principal was $48,000.00. The bank charges interest at 6% per year on the outstanding principal, for one month; the rest of the installment repays principal.
Assumptions: No interest has been accrued for this month before the payment.
Account Debit Credit Notes Payable $1,260.00 Interest Expense $240.00 Cash $1,500.00 Why
One month of interest is $48,000.00 × 6% / 12 = $240.00; the rest of the installment, $1,500.00 − $240.00 = $1,260.00, reduces Notes Payable. Cash is credited for the whole $1,500.00.
Accruing interest on a note payable at year end
The company issued a six-month, 7% note payable for $18,000.00 to a supplier 2 months before December 31. Principal and interest are due at maturity. Record the interest accrued at December 31.
Assumptions: Nothing has been recorded for the interest yet. Interest is computed in whole months: principal × rate × months / 12.
Account Debit Credit Interest Expense $210.00 Interest Payable $210.00 Why
Interest incurred so far is $18,000.00 × 7% × 2/12 = $210.00. It is an expense of this year, owed until maturity: debit Interest Expense and credit Interest Payable. Notes Payable stays at the principal.
Lending cash to an employee
The company lends $1,200.00 in cash to an employee. The loan carries no interest and will be deducted from her salary in equal parts over the next 6 months.
Assumptions: The employee signs no promissory note. The loan is not an advance on salary already earned.
Account Debit Credit Loans to Employees $1,200.00 Cash $1,200.00 Why
Cash leaves the business but the employee owes it back, so the company has a receivable, not an expense: debit Loans to Employees and credit Cash for $1,200.00. Salaries Expense is recorded each month in full; the deductions only reduce the receivable.
Repaying a bank overdraft
The company has an overdraft line with its bank, kept separate from its checking account. Today it repays the $3,800.00 owed on that line with a payment from its checking account.
Assumptions: The amount drawn is a short-term debt to the bank. Interest on it has already been paid and recorded.
Account Debit Credit Bank Overdraft $3,800.00 Cash $3,800.00 Why
The overdraft is a liability, separate from Cash: debit Bank Overdraft and credit Cash for $3,800.00. No expense arises; the interest was recorded before.
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