Accounting for Liabilities Georgia CTAE Resource Network Instructional Resources Office Written by: Dr. Marilynn K. Skinner May 2009

Current Liabilities Debts of a company that are paid with current assets. Debt that is paid off within a year Debts of a company that are paid with current assets. Debt that is paid off within a year

Notes Payable Debts of a company that result in the company signing a negotiable loan instrument (note) Notes may be: Interest Bearing – Interest accrues as the note matures. Non-Interest Bearing – the interest is included in the face value (principal) of the note Debts of a company that result in the company signing a negotiable loan instrument (note) Notes may be: Interest Bearing – Interest accrues as the note matures. Non-Interest Bearing – the interest is included in the face value (principal) of the note

Interest Bearing Note Example: On August 20 Spectrum Electronics purchased $1,000 in merchandise on account from Jetto Enterprises, the terms were n/30. On September 19, Spectrum could not pay the amount and asked Jetto to accept a note payable on the account Example: On August 20 Spectrum Electronics purchased $1,000 in merchandise on account from Jetto Enterprises, the terms were n/30. On September 19, Spectrum could not pay the amount and asked Jetto to accept a note payable on the account Date DescriptionDebitCredit 8/20Accts. Pay/Jetto1,000 Notes Payable1,000

Paying an Interest Bearing Note Payable On December 18 Spectrum paid the principal plus interest back to Jetto *Principal X Interest Rate X TIME = Interest 1, X.10 X 90/365 = On December 18 Spectrum paid the principal plus interest back to Jetto *Principal X Interest Rate X TIME = Interest 1, X.10 X 90/365 = DateDescriptionDebitCredit 12/18Note Payable1, Interest Expense* Cash

Adjusting for Accrued Interest Example: On December 22 Spectrum issued a note payable to Jetto for $3000. The terms of the note were 30 days at 11%. Complete the entry for accrued interest at December 31. Principal X Interest Rate X Time = Interest 3000 X.11 X 9/365 = 8.14 Example: On December 22 Spectrum issued a note payable to Jetto for $3000. The terms of the note were 30 days at 11%. Complete the entry for accrued interest at December 31. Principal X Interest Rate X Time = Interest 3000 X.11 X 9/365 = 8.14 DateDescriptionDebitCredit 12/31Interest Expense8.14 Interest Payable8.14

Adjusting for Accrued Interest Example: On December 22 Spectrum issued a note payable to Jetto for $3000. The terms of the note were 30 days at 11%. Complete the entry for the payment of the note on January 21. Principal X Interest Rate X Time = Interest 3000 X.11 X 21/365 = Example: On December 22 Spectrum issued a note payable to Jetto for $3000. The terms of the note were 30 days at 11%. Complete the entry for the payment of the note on January 21. Principal X Interest Rate X Time = Interest 3000 X.11 X 21/365 = DateDescriptionDebitCredit 1/21Note Payable Interest Payable 8.14 Interest Expense Cash in Bank

Noninterest Bearing Note Payable Also called a discounted note payable Bank requires borrower to pay interest at time loan is issued Borrower receives less than face value of note at time of the loan. Also called a discounted note payable Bank requires borrower to pay interest at time loan is issued Borrower receives less than face value of note at time of the loan.

Noninterest Bearing Note Payable Example On February 15 Spectrum issued a $4,200, 60-day noninterest bearing note, discounted at 12%. What are the proceeds from the note? Face value X Discount Rate X Time = Bank Discount 4, X.12 X 60/365 = Face Value - Bank Discount = Proceeds 4, = 4, On February 15 Spectrum issued a $4,200, 60-day noninterest bearing note, discounted at 12%. What are the proceeds from the note? Face value X Discount Rate X Time = Bank Discount 4, X.12 X 60/365 = Face Value - Bank Discount = Proceeds 4, = 4,117.15

Recording a Noninterest Bearing Note On February 15 Spectrum issued a $4,200, 60- day noninterest bearing note, discounted at 12%. What is the entry to record the note? DateDescriptionDebitCredit 2/15Cash in Bank Discount on Notes Payable Notes Payable

Recording Payment of a Noninterest Bearing Note On April 16 Spectrum paid the $4,200, 60-day noninterest bearing note, discounted at 12%. What is the entry to record the note? DateDescriptionDebitCredit 4/16Interest Expense Notes Payable Discount on note payable Cash in Bank

Adjusting for Accrued Interest for a Noninterest Bearing Note On December 16 Spectrum issued a $2,500, 45-day noninterest bearing note, discounted at 12%. What is the entry to record the accrual of interest on December 31? Principal X Interest Rate X Time = Interest 2,500 X.12 X 15/365 = On December 16 Spectrum issued a $2,500, 45-day noninterest bearing note, discounted at 12%. What is the entry to record the accrual of interest on December 31? Principal X Interest Rate X Time = Interest 2,500 X.12 X 15/365 = DateDescriptionDebitCredit 12/31Interest Expense12.33 Discount on Notes Payable 12.33

Adjusting for Accrued Interest for a Noninterest Bearing Note On December 16 Spectrum issued a $2,500, 45-day noninterest bearing note, discounted at 12%. What is the entry to record the payment of the note on January 30? DateDescriptionDebitCredit 1/30Interest Expense24.66 Notes Payable Discount on Notes Payable Cash in Bank