CH. 7.1 NOTES OUTLINE
Interest-Bearing Notes Payable
A. Vocabulary
a. Current Liabilities
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Examples:
b. Long-Term Liabilities
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c.
Examples:
Note Payable
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May issue a note payable to:
o
o
o
d. Interest-Bearing Note
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B. Issuing an Interest-Bearing Note Payable
a. On August 20 Spectrum Electronics purchased $1,000 of merchandise on account from
Jetto Enterprises. The credit terms were n/30. Spectrum recorded the transaction as:
i. Debit __________________________
ii. Credit _________________________
b. Scenario: Suppose on Sept. 19th(due date), Spectrum could not pay the amount due and
asked Jetto to accept a note for the amount of the account payable. Jetto agreed.
c. Business Transaction: On September 19 Spectrum issued a 90-day, 10% note payable for
$1,000 to Jetto Enterprises in place of its account payable, Note 17.
i. Identify and classify the accounts affected:
1. ___________________________________________
a. ___________________________________
2. __________________________________________
a. ____________________________________
C. Paying an Interest-Bearing Note Payable
a.
b.
c. Transaction Example: ______________ + _______________ = ________________
Formula:
d. Business Transaction: On December 18 Spectrum issued Check 9667 to Jetto Enterprises
for $1,024.66, the maturity value of Note 17.
i. Identify accounts affected:
1. ___________________________________________
a. ___________________________________
2. __________________________________________
a. ____________________________________
3. ___________________________________________
a. ___________________________________
4. __________________________________________
a. ____________________________________
DEMONSTRATION PACKET – PROBLEM 7-1
D. Renewing an Interest-Bearing Note Payable at Maturity
a. Occasionally the maker of the note. . .
b. The maker may arrange. . .
c. Scenario: Suppose on October 23 Spectrum issued a 60-day, 10 percent, $3,000 note to
Dante Manufacturing. When the note was due on December 22, Spectrum was unable to
pay it. Dante Manufacturing allowed Spectrum to renew the note. First, Spectrum paid the
interest due on Note 18, $49.32.
i. Formula: _________________________________________________________
d. Scenario Continued: Then Spectrum issued Note 19, a 30-day, 11 percent, $3,000 note. A
compound entry is made to record the payment of the interest on Note 18 and the issuance
of Note 19.
e. Transaction: On December 22 Spectrum issued Check 9681 to Dante Manufacturing for
$49.32 in payment of the interest due on Note 18. Spectrum issued a 30-day, 11%, $3,000
note payable (Note 19) to replace Note 18.
i. Identify and classify accounts affected:
1. ___________________________________________
a. ___________________________________
2. __________________________________________
a. ____________________________________
3. ___________________________________________
a. ___________________________________
4. __________________________________________
a. ____________________________________
DEMONSTRATION PACKET – PROBLEM 7-2
E. Adjusting for Accrued Interest Expense
a. A note issued may not mature until. . .
b. Previous Scenario: Spectrum’s accounting period ends on December 31. On December 22
the company issued Note 19, a 30-day note that matures on January 21 of the next
accounting period. On that date Spectrum will repay the principal plus the interest.
i. In December Spectrum incurred interest expense for nine days (Dec 22-31).
ii. Accrued Expense – An ______________ incurred in one ____________________ _______________
but not ____________ until a _______________ accounting period.
Interest for the previous accounting period (Dec 22-31):
$3,000 x .11 x (9/365) = $8.14
c. Business Transaction: On December 31 Spectrum recorded the adjusting entry for accrued
interest expense on Note 19, memo 245.
i. Identify and classify accounts affected:
1. ___________________________________________
a. ___________________________________
2. __________________________________________
a. ____________________________________
d. Since accrued interest of $8.14 has already been recorded, interest expense for the current
period is $____________.
$3000 x .11 x (30/365) = $_______ Interest on _________________________
- $ 8.14 Interest on _________________________
$18.98 Interest _____________________________
e. Business Transaction: On January 21 Spectrum issued Check 9832 for $3,027.12 to Dante
Manufacturing in payment of Note 19.
i. Identify and classify accounts affected:
1. ___________________________________________
a. ___________________________________
2. __________________________________________
a. ____________________________________
3. ___________________________________________
a. ___________________________________
4. __________________________________________
a. ____________________________________
DEMONSTRATION PACKET – PROBLEM 7-3