Chapter 11, Problem 4E

To determine

Concept Introduction:

Notes Payable:

Notes Payable are long term negotiable instruments of debt issued by corporate entities to secure funds from the public These funds are used to either fund long term capital expenditure or similar long term investment opportunities.

Notes Payable represent steady income for the investor in the form of periodic interest payments by the entity issuing the Notes Payable.

Notes Payable are issued at par (at face value), at premium (at higher than face value) or at a discount (at lower than face value).

Requirement 1:

Maturity Date of 90 Day Notes Payable undertaken on November 1.

Answer to Problem 4E

Maturity Date of a 90 Day Notes Payable undertaken on November 1 is January 30.

Explanation of Solution

Notes Payable are long term negotiable instruments of debt issued by corporate entities to secure funds
from the public. These funds are used to either fund long term capital expenditure or similar
long-term investment opportunities.

Notes Payable represent steady income for the investor in the form of periodic interest payments by the
entity issuing the Notes Payable. Notes Payable are issued at par (at face value), at premium (at higher than facevalue) or at a discount (at lower than face value).

If the market rate of interest equals the rate of interest of the Notes Payable, the Notes Payable is issued at par.

If the market rate of interest is less than the rate of interest of the Notes Payable, the Notes Payable is issued at apremium. If the market rate of interest is greater than the rate of interest of the Notes Payable, the Notes Payable isissued at a discount.

Maturity Date of the Notes Payable is calculated as follows:

Months	Days	Time to Maturity Left
Date of Issuance of Notes Payable	Nov-01	90 Days
At the End of November	29	61 Days
At the End of December	31	30 Days
Maturity Date in January	30	0 Days

Hence, the maturity date of the Notes Payable is calculated.

To determine

Concept Introduction:

Notes Payable:

Notes Payable are long term negotiable instruments of debt issued by corporate entities to secure funds from the public These funds are used to either fund long term capital expenditure or similar long-term investment opportunities.

Notes Payable represent steady income for the investor in the form of periodic interest payments by the entity issuing the Notes Payable.

Notes Payable are issued at par (at face value), at premium (at higher than face value) or at a discount (at lower than face value).

Requirement 2:

Interest Expense for the current Year

Answer to Problem 4E

Interest Expense for the current Year is $3,000

Explanation of Solution

Notes Payable are long term negotiable instruments of debt issued by corporate entities to secure funds
from the public. These funds are used to either fund long term capital expenditure or similar
long-term investment opportunities.

Notes Payable represent steady income for the investor in the form of periodic interest payments by the
entity issuing the Notes Payable. Notes Payable are issued at par (at face value), at premium (at higher than facevalue) or at a discount (at lower than face value).

If the market rate of interest equals the rate of interest of the Notes Payable, the Notes Payable is issued at par.

Ifthe market rate of interest is less than the rate of interest of the Notes Payable, the Notes Payable is issued at apremium.

If the market rate of interest is greater than the rate of interest of the Notes Payable, the Notes Payable isissued at a discount.

Interest expense of the Notes Payable for the current year is calculated as follows:

Particulars	Amount ($)
Issue Proceeds	$ 200,000.00
Rate of Interest	9%
Interest for the current Year ($200,000 x 9% x 60/360)	$ 3,000.00

Interest for the current year is calculated for 60 days since in the current year, the Notes Payable is outstanding for 60 days. Following formula is used to calculate the interest payable for the current year:

  $\text{Interest Payable = }\frac{\text{Days bond is outstanding in current year x Issue Proceeds}}{360}$

Hence, the interest payable for the current year is calculated.

To determine

Concept Introduction:

Notes Payable:

Notes Payable are long term negotiable instruments of debt issued by corporate entities to secure funds from the public These funds are used to either fund long term capital expenditure or similar long-term investment opportunities.

Notes Payable represent steady income for the investor in the form of periodic interest payments by the entity issuing the Notes Payable.

Notes Payable are issued at par (at face value), at premium (at higher than face value) or at a discount (at lower than face value).

Requirement 3:

Interest Expense for the next Year

Answer to Problem 4E

Interest Expense for the next Year is $1,500

Explanation of Solution

Notes Payable are long term negotiable instruments of debt issued by corporate entities to secure funds
from the public. These funds are used to either fund long term capital expenditure or similar
long-term investment opportunities.

Notes Payable represent steady income for the investor in the form of periodic interest payments by the
entity issuing the Notes Payable. Notes Payable are issued at par (at face value), at premium (at higher than facevalue) or at a discount (at lower than face value).

If the market rate of interest equals the rate of interest of the Notes Payable, the Notes Payable is issued at par. Ifthe market rate of interest is less than the rate of interest of the Notes Payable, the Notes Payable is issued at apremium. If the market rate of interest is greater than the rate of interest of the Notes Payable, the Notes Payable isissued at a discount.

Interest expense of the Notes Payable for the current year is calculated as follows:

Particulars	Amount ($)
Issue Proceeds	$ 200,000.00
Rate of Interest	9%
Interest for the current Year ($200,000 x 9% x 30/360)	$ 1,500.00

Interest for the current year is calculated for 30 days since in the next year, the Notes Payable is outstanding for 60 days. Following formula is used to calculate the interest payable for the current year:

  $\text{Interest Payable = }\frac{\text{Days bond is outstanding in current year x Issue Proceeds}}{360}$

Hence, the interest payable for the next year is calculated.

To determine

Concept Introduction:

Notes Payable:

Notes Payable are long term negotiable instruments of debt issued by corporate entities to secure funds from the public These funds are used to either fund long term capital expenditure or similar long term investment opportunities.

Notes Payable represent steady income for the investor in the form of periodic interest payments by the entity issuing the Notes Payable.

Notes Payable are issued at par (at face value), at premium (at higher than face value) or at a discount (at lower than face value).

Journal Entries:

Journal entries are the first step in recording financial transactions and preparation of financial statements.

These represent the impact of the financial transaction and demonstrate the effect on the accounts impacted in the form of debits and credits.

Assets and expenses have debit balances and Liabilities and Incomes have credit balances and according to the business transaction, the accounts are appropriately debited will be credited by credited to reflect the effect of business transactions and events.

Requirement 4:

Journal Entry to record issuance of Notes Payable, interest payable and repayment of Notes Payable

Answer to Problem 4E

Date	Particulars	Debit	Credit
November 1	Cash	$200,000
	Notes Payable		$200,000
	(Being Notes Payable issued for 90 Days at 9% interest)
December 31	Interest expense on Notes Payable	$3,000
	Interest Payable on Notes Payable		$3,000
	(Being interest expense on Notes Payable recorded)
January 30	Notes Payable	$200,000
	Interest Expense on Notes Payable	$1,500
	Cash		$201,500
	(Being maturity of Notes Payable recorded)

Explanation of Solution

Notes Payable are long term negotiable instruments of debt issued by corporate entities to secure funds
from the public. These funds are used to either fund long term capital expenditure or similar
long-term investment opportunities.

Notes Payable represent steady income for the investor in the form of periodic interest payments by the
entity issuing the Notes Payable. Notes Payable are issued at par (at face value), at premium (at higher than facevalue) or at a discount (at lower than face value).

If the market rate of interest equals the rate of interest of the Notes Payable, the Notes Payable is issued at par.

Ifthe market rate of interest is less than the rate of interest of the Notes Payable, the Notes Payable is issued at apremium.

If the market rate of interest is greater than the rate of interest of the Notes Payable, the Notes Payable isissued at a discount.

Interest expense of the Notes Payable for the current year is calculated as follows:

Particulars	Amount ($)
Issue Proceeds	$ 200,000.00
Rate of Interest	9%
Interest for the current Year ($200,000 x 9% x 60/360)	$ 3,000.00
Interest for the Next Year ($200,000 x 9% x 30/360)	$ 1,500.00

Interest for the current year is calculated for 60 days since in the current year, the Notes Payable is outstanding for 60 days. Following formula is used to calculate the interest payable for the current year:

  $\text{Interest Payable = }\frac{\text{Days bond is outstanding in current year x Issue Proceeds}}{360}$

Interest for the current year is calculated for 30 days since in the next year, the Notes Payable is outstanding for 30 days. Following formula is used to calculate the interest payable for the next year:

  $\text{Interest Payable = }\frac{\text{Days bond is outstanding in next year x Issue Proceeds}}{360}$

Assets and Expenses have debit balances and must be debited in order to increase their balance and credited in order to decrease their balance.

Liabilities and Incomes have credit balances and must be debited in order to decrease their balance and credited in order to increase their balance.
On November 1, Cash will be debited by $200,000 and Notes Payable will be credited by $200,000sinceNotes Payablewere issued for 90 Days at 9% interest.

On December 31, Interest expense on Notes Payable will be debited by $3,000 and Interest Payable on Notes Payable will be credited by $3,000since interest expense on Notes Payablewas recorded.

On January 30, Notes Payable will be debited by $200,000, Interest Expense on Notes Payable will be debited by $1,500 and Cash will be credited by $201,500since maturity of Notes Payable wasrecorded.

Cash is an asset and must be debited in order to increase their balance and credited in order to decrease their balance.

Notes Payable, Interest payable on Notes Payable are liabilities and must be debited in order to decrease their balance and credited in order to increase their balance.

Interest expense on Notes Payable is an expense and must be debited in order to increase their balance and credited in order to decrease their balance.

Hence, the transactions are journalized.