1. © 2014 Cengage Learning. All Rights Reserved.
Learning Objectives
What options does a business have if they cannot pay their monthly expenses?
© 2014 Cengage Learning. All Rights Reserved.

2. LOANS Why do businesses/people take out loans?
LESSON 20-1
4/22/2018
LOANS
Why do businesses/people take out loans?
What is the cost of taking out a loan?
What is the difference between:
Credit Cards
Loans
Notes
LESSON 20-1

3. Basic Types of Loans Student Loans Debt Consolidation Automobile
Personal
Mortgage
Home Equity
Secured
Unsecured
Short-term
Long-term
Soft
Subprime
Discounted
Policy loan
Lender of Last Resort
Federal Reserve bailing out a large corporation
LESSON 20-1

4. Short-Term Debt Financing Options
Lesson 18-1
Short-Term Debt Financing Options
debt financing: Obtaining capital by borrowing money
Note: Short Term Loan (less than a year)
line of credit: A bank loan agreement that provides immediate short-term access to cash
Loan that stays open for years
Instant cash flow
Monthly/yearly bank fees
Debt

5. Drawing on a Line of Credit
Lesson 18-1
Drawing on a Line of Credit
November 14. Drew $15, on its line of credit. Receipt No. 912.
Line of Credit is a liability account 1
Date 2
Account Title 3
Receipt Number 4
Amount Borrowed 5
Cash Received

6. Promissory Note Terms
Promissory Note: Loan, usually short-term, but could be long. Written promise to pay back money on a specific date
Principle: Amount of cash borrowed
Rate: Percentage of interest paid to borrow loan
Time: Length of days/months/years loan will be out
Interest: Cost of borrowing money
Principle X Rate X Time (in years)
Maturity Date: The date the loan must be paid off
Notes Payable: Liability Account used for notes
LESSON 20-1

7. Signing a Promissory Note for an Extension of Time
Lesson 18-1
Signing a Promissory Note for an Extension of Time
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. 142.
Note Payable is a liability account. 1
Debit Accounts Payable and Vendor’s Account 2
Credit Notes Payable

8. Paying Principal and Interest on a Loan
Lesson 18-1
Paying Principal and Interest on a Loan
Interest incurred on borrowed funds is called interest expense.
Will be paid when the note or line of credit is paid
Principal X Rate X Time

9. MATURITY DATE OF PROMISSORY NOTES
May 18, 90-Day Note
May18–May days
June 30 days
July 31 days
August 1–August days
Total 90 days
The date the note is written is not counted, but the maturity date is counted.
LESSON 20-1

10. INTEREST ON PROMISSORY NOTES
Interest for One Year
Interest for One Year =
Time in Years ×
Interest Rate
Principal
$20,000.00 × 6% × 1 =
$1,200.00
Interest for Fraction of Year
Interest for Fraction of Year =
Time as Fraction of Year ×
Interest Rate
Principal
$20,000.00 × 6% × 90
360 =
$300.00
LESSON 20-1

11. INTEREST ON PROMISSORY NOTES
page 590
Maturity Value
Maturity Value =
Interest +
Principal
$20,000.00 +
$300.00 =
$20,300.00
LESSON 20-1

12. Paying Principal and Interest on a Promissory Note
Lesson 18-1
Paying Principal and Interest on a Promissory Note
LO2
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. 751.
4,200.00
Notes Payable
Nov
Interest Expense
Principal ×
Annual Interest Rate
Time as Fraction of a Year =
Interest for Fraction of Year
$4,200.00
12%
60/360
$84.00
Cash
Nov. 29 4,284.00 1
Account Title 3
Principal Amount 5
Cash Paid 2
Account Title 4
Interest Amount