Short-Term
Financing
© Copyright Doug Hillman 1999
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Financing Considerations
Interest cost
 Continuing availability of financing
method
 Effects on availability and cost of
alternative sources of money

© Copyright Doug Hillman 1999
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Promissory Note

Unconditional written promise to pay
© Copyright Doug Hillman 1999
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Promissory Note

Unconditional written promise to pay a
definite sum of money
© Copyright Doug Hillman 1999
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Promissory Note

Unconditional written promise to pay a
definite sum of money on demand or at
a future date.
© Copyright Doug Hillman 1999
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Promissory Note
Unconditional written promise to pay a
definite sum of money on demand or at
a future date.
 Person promising to payee is maker
 Person promised the payment is payee

© Copyright Doug Hillman 1999
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Characteristics of Promissory
Note
In writing and signed by maker
 Unconditional promise to pay a certain
sum of money
 Payable to a bearer or stated person
 Payable on demand or a specified future
time
 May or may not be interest bearing

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Maturity Date
Date when payment is due
 Calculation

› Days in month note is dated minus date of
note
› Add number of days in succeeding months
until total is reached
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Computing Interest
Interest = Principal x Rate
 Maturity stated in days
 $30
= $1,000 x 0.12
 Maturity stated in months
 $50
= $1,000 x 0.12
 Maturity stated in years
 $240
= $1,000 x 0.12

© Copyright Doug Hillman 1999
x Time
x 90/360
x
5/12
x
2
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Maturity Value of Note
Principal amount plus interest to
maturity
 $1,000, 12%, 90 day note
 $1,000 + $30 = $1,030

© Copyright Doug Hillman 1999
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Annual Effective Interest Rate
Average annual interest cost
 divided by
 Average outstanding principal
 Borrow $1,000 with 24 payments of $50
 24 x $50 = $1,200
 $1,200 - $1,000 = $200
 $100 / $500 = 20%

© Copyright Doug Hillman 1999
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Issuance of Note Bearing
Interest on Face Value

At issuance
› Increase Cash for amount received (face
value)
› Increase Notes Payable for face value

At maturity
› Decrease Notes Payable for face value
› Increase Interest Expense for interest to
maturity
› Decrease Cash for total
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Issuance of Note Discounted
on Face Value

At issuance
› Increase Cash for face value less discount
› Increase Discount on Notes Payable for
discount
› Increase Notes Payable for face value
© Copyright Doug Hillman 1999
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Issuance of Note Discounted
on Face Value

At maturity
› Increase Interest Expense for discount
› Decrease Discount on Notes Payable for
discount
› Decrease Notes Payable for face value
› Decrease Cash for face value
© Copyright Doug Hillman 1999
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Effective Interest Calculation
Effective
Interest
Rate
© Copyright Doug Hillman 1999
Discount
360
X
=
Net Proceeds
Term
of Note
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End of Period Adjustments
Notes written in one accounting period
and maturing in a later period require
adjustment to accrue interest
 Calculate interest from date of note to
period ending date

© Copyright Doug Hillman 1999
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Notes Receivable

Receipt of note for sale
› Record normal sale entry
› Transfer amount from Accounts Receivable
to Notes Receivable

Receipt of note in settlement of open
account
› Transfer amount from Accounts Receivable
to Notes Receivable
© Copyright Doug Hillman 1999
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Discounting Customers Note
Determine maturity value
 Find discount period bank will hold note
 Compute discount by multiplying
maturity value by discount rate
 Deduct discount from maturity value to
determine proceeds

© Copyright Doug Hillman 1999
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Discounting Customers Note
Payee is contingently liable for note if
maker does not pay at maturity
 Notes Receivable Discounted used to
indicate contingent liability
 Presentation
Notes Receivable
$1,000
Deduct: N/R discounted
400
Net Notes Receivable
$600

© Copyright Doug Hillman 1999
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Analyzing Information
Determine the availability and adequacy
of credit sources
 What percent of credit line used up at
balance sheet date?
 When does the line expire?
 Is it likely to be renewed?
 Are any credit line requirements not
being met?
 Is credit line sufficient?

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