© 2014 Cengage Learning. All Rights Reserved. Learning Objectives © 2014 Cengage Learning. All Rights Reserved. LO1Identify available sources of debt financing. LO2 Journalize transactions related to short-term debt financing.

© 2014 Cengage Learning. All Rights Reserved. Short-Term Debt Financing Options ●The payment of an operating expense necessary to earn revenue is called a revenue expenditure. ●Obtaining capital by borrowing money for a period of time is called debt financing. ●A bank loan agreement that provides immediate short-term access to cash is called a line of credit, or credit line. ●The interest rate charged to a bank’s most creditworthy customers is called the prime interest rate. SLIDE 2 Lesson 18-1 LO1

© 2014 Cengage Learning. All Rights Reserved. Drawing on a Line of Credit SLIDE 3 LO2 Lesson 18-1 November 14. Drew $15, on its line of credit. Receipt No , Cash Line of Credit 15, Date 2 2 Account Title 3 3 Receipt Number 4 4 Amount Borrowed 5 5 Cash Received

© 2014 Cengage Learning. All Rights Reserved. Signing a Promissory Note for an Extension of Time SLIDE 4 September 30. Sun Treasures signed a 60-day, 12% note to Hass, Inc., for an extension of time on its account payable, $4, Memorandum No LO2 Lesson , GENERAL LEDGER Accounts Payable Notes Payable 4, ACCOUNTS PAYABLE LEDGER Hass, Inc. Bal.4, Debit Accounts Payable and Vendor’s Account 2 2 Credit Notes Payable

© 2014 Cengage Learning. All Rights Reserved. Paying Principal and Interest on a Promissory Note ●Interest incurred on borrowed funds is called interest expense. ●Expenses that are not related to a business’s normal operations are called non-operating expenses. SLIDE 5 LO2 Lesson 18-1

© 2014 Cengage Learning. All Rights Reserved. Paying Principal and Interest on a Promissory Note SLIDE 6 November 29. Paid cash for the maturity value of the August 30 note: principal, $4,200.00, plus interest, $84.00; total, $4, Check No LO2 Lesson , Notes Payable Nov Interest Expense Cash Nov. 294, Account Title Principal Amount 4 4 Interest Amount 5 5 Cash Paid Principal× Annual Interest Rate × Time as Fraction of a Year = Interest for Fraction of Year $4,200.00×12%×60/360=$84.00

© 2014 Cengage Learning. All Rights Reserved. Lesson 18-1 Audit Your Understanding 1.What information is specified in the loan agreement for a line of credit? SLIDE 7 ANSWER The loan agreement specifies the maximum amount that can be borrowed, the interest rate, term of the agreement, and repayment terms. Lesson 18-1

© 2014 Cengage Learning. All Rights Reserved. Lesson 18-1 Audit Your Understanding 2.On a line of credit, how would an interest rate of 3% over the prime rate be stated? SLIDE 8 ANSWER Prime plus 3% Lesson 18-1

© 2014 Cengage Learning. All Rights Reserved. Lesson 18-1 Audit Your Understanding 3.Is interest expense an operating or a non- operating expense? SLIDE 9 ANSWER A non-operating expense Lesson 18-1

© 2014 Cengage Learning. All Rights Reserved. Lesson 18-1 Audit Your Understanding 4.Where is interest expense listed in a chart of accounts? SLIDE 10 ANSWER In a section titled Other Expenses Lesson 18-1