Chapter 7.2 NOTES OUTLINE
Noninterest-Bearing Notes Payable
A. Discounted Note Payable
a. _______________________________________________________________________
b. _______________________________________________________________________
c. _______________________________________________________________________
d. _______________________________________________________________________
e. _______________________________________________________________________
B. Key Terms
a. Bank Discount

b. Proceeds

C. Recording the Issuance of a Noninterest-Bearing Note Payable
a. On February 15 Spectrum issued a $4,200, 60-day, noninterest-bearing note, discounted at 12%.
b. First, calculate the __________________________.
 ______________ x ___________________x ______________
 Try it!
 $______________
c. What are the proceeds?
 _________________ - ________________ = $__________________
d. Recording a Bank Discount
 _________________________________ (Increases, Debit) called:
 _________________________________________
 Bank discount is the ______________________________________ on the note.
 Reported on the __________________________________ as a
_____________________ from _______________________________________.
 Difference is known as
_______________________________________________________.
e. Business Transaction
 On February 15 Spectrum issued a $4,200, 60-day, noninterest-bearing note payable to
Valley National Bank that was discounted at 12%, Note 11 and Receipt 1995.
 Identify and Classify Accounts Affected:
a. ___________________________________
i. ___________________________
b. ___________________________________
i. ___________________________
c. ___________________________________
i. ___________________________
f.
When a noninterest-bearing note payable matures, a check is written for ……
g. At this time, the discount is recognized as an ___________________.
h. Bank Discount is transferred from the ___________________________________ account to the
___________________________________ account.
i. When the transaction is recorded, the balance of
__________________________________________, is reduced to ____________.
j.
Two entries are used to record:
#1 ________________________________________________________________
#2 ________________________________________________________________
k. Business Transaction
 On April 16 Spectrum issued Check 5560 for $4,200 to Valley National Bank in
payment of Note 11.
 Identify and Classify Accounts Affected:
1. ______________________________________________________________
______________________________________________________________
2. ______________________________________________________________
______________________________________________________________
D. Adjusting for Prepaid Interest Expense
a. Prepaid Expense
 An __________________________ paid in ____________________________
 The ___________________________________ on a noninterest-bearing note payable
is the interest expense deducted in _________________________.
b. When the note is paid on the _______________________________, the interest charge is
recognized as an _____________________________.
c. _______________________________________ are made to record notes that are issued in one
period but do not mature until the next.
d. Scenario
 Suppose that Spectrum issued a $2,500, 45-day, noninterest-bearing note payable (Note
21) that was discounted at 12 percent at Youngwood National Bank on December 16.
 What is the bank discount?
a. $_______________
 At the end of December, part of the $36.99 bank discount is an expense. An adjusting
entry is made to recognize the expense in the current accounting period.
 What amount would be the interest expense for the current accounting period?
a. $________________
e. Business Transaction
 On December 31 Spectrum recorded the adjusting entry for prepaid interest on Note 21,
Memo 244.
 Identify and Classify the Accounts Affected:
a. ________________________________________
i. ________________________________
b. ________________________________________
i. ________________________________
c. _________________
f. Next we will record the full payment of Note 21.
g. On January 30 Spectrum issued Check 10300 for $2,500 to Youngwood National Bank in
payment of Note 21. Identify and Classify the Accounts Affected:
a. ________________________________________
i. ________________________________
b. ________________________________________
i. ________________________________
c. ________________________________________
i. ________________________________
d. ________________________________________
i. ________________________________