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

3. 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.  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. Section 2Notes Payable (cont'd.)

4. Recording the Issuance of an Interest-Bearing Note Payable Section 2Notes Payable (cont'd.) 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. ANALYSIS Identify1.The accounts affected are Cash in Bank and Notes Payable. Classify2.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. Recording the Issuance of an Interest-Bearing Note Payable (cont'd.) Section 2Notes 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 RULE 4.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. Recording the Issuance of an Interest-Bearing Note Payable (cont'd.) Section 2Notes 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 ACCOUNTS 6. Cash in Notes BankPayable Debit + 7,000 Credit – Debit – Credit + 7,000

7. Recording the Issuance of an Interest-Bearing Note Payable (cont'd.) Section 2Notes 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 ENTRY 7.

8. Section 2Notes Payable (cont'd.) 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). ANALYSIS Identify1.The accounts affected are Notes Payable, Interest Expense, and Cash in Bank. Classify2.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. Recording the Payment of an Interest-Bearing Note Payable

9. Section 2Notes 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). Recording the Payment of an Interest-Bearing Note Payable (cont'd.) DEBIT-CREDIT RULE 4.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 2Notes 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). Recording the Payment of an Interest-Bearing Note Payable (cont'd.) T ACCOUNTS 6. Notes PayableCash in Bank Debit + Interest Expense Debit + 207.12 Credit + Debit – 7,000 Credit – Credit – 7,207.12

11. Section 2Notes Payable (cont'd.) Business Transaction (cont'd.) JOURNAL ENTRY 7. Recording the Payment of an Interest-Bearing Note Payable (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).

12.  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.  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. Noninterest-Bearing Notes Payable Section 2Notes Payable (cont'd.)

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

14. Recording the Issuance of a Non- interest-Bearing Note Payable Section 2Notes Payable (cont'd.) 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. ANALYSIS Identify1.The accounts affected are Cash in Bank, Discount on Notes Payable, and Notes Payable. Classify2.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. Recording the Issuance of a Non- interest-Bearing Note Payable (cont'd.) Section 2Notes 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 RULE 4.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 2Notes Payable (cont'd.) Business Transaction (cont'd.) T ACCOUNTS 6. Cash in BankNotes Payable Debit – Discount on Notes Payable Debit + 44.38 Credit – Debit + 1,455.62 Credit – Credit + 1,500.00 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. Recording the Issuance of a Non- interest-Bearing Note Payable (cont'd.)

17. Section 2Notes 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 ENTRY 7.

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