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

Accounting for Liabilities

Georgia CTAE Resource NetworkGeorgia CTAE Resource NetworkInstructional Resources OfficeInstructional Resources Office

Written by: Dr. Marilynn K. SkinnerWritten by: Dr. Marilynn K. SkinnerMay 2009May 2009

Current Liabilities

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

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

Date Description Debit Credit

8/20 Accts. Pay/Jetto 1,000

Notes Payable 1,000

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 1,000.00 X .10 X 90/365 = 24.66

Date Description Debit Credit

12/18 Note Payable 1,000.00

Interest Expense* 24.66

Cash 1024.66

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

Date Description Debit Credit

12/31 Interest Expense 8.14

Interest Payable 8.14

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 = 18.98

Date Description Debit Credit1/21 Note Payable 3000.00

Interest Payable 8.14Interest Expense 18.98 Cash in Bank 3027.12

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.

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 Discount4,200.00 X .12 X 60/365 = 82.85

Face Value - Bank Discount = Proceeds4,200.00 - 82.85 = 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?

Date Description Debit Credit2/15 Cash in Bank 4117.15

Discount on Notes Payable 82.58 Notes Payable 4200.00

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?

Date Description Debit Credit4/16 Interest Expense 82.85

Notes Payable 4200.00 Discount on note payable 82.85 Cash in Bank 4200.00

Adjusting for Accrued Interest for a Noninterest Bearing

NoteOn 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 = Interest2,500 X .12 X 15/365 = 12.33

Date Description Debit Credit12/31 Interest Expense 12.33

Discount on Notes Payable 12.33

Adjusting for Accrued Interest for a Noninterest Bearing

NoteOn 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?

Date Description Debit Credit1/30 Interest Expense 24.66

Notes Payable 2500.00 Discount on Notes Payable 24.66 Cash in Bank 2500.00