Activation Exercise 11-1: Short-Term Notes Payable

Terms and Definitions

A short-term note payable is _(current asset, current liability)_ a that may be issued to purchase merchandise or assets or to satisfy an existing accounts payable. There are two types of short-term notes payable: interest bearing notes and discounted notes. If a note is issued for cash, the amount of cash that the company receives on the date the note is issued is called the _(face value, proceeds).

Understanding the Business Transaction

On May 1 Xander Company borrows $67,800 from Last National Bank by issuing a 60-day 12% note payable.

If this is an interest bearing note, the proceeds of the note will be equal to _(the face amount of the note | the face amount of the note less interest | the face amount of the note plus interest)__, and at maturity Xander must pay__(the face amount of the note | the face amount of the note less interest | the face amount of the note plus interest)__ to Last National Bank.

If this is a discounted note, the proceeds of the note will be equal to ____________, and at maturity Xander must pay the face amount of the note to Last National Bank.

Determine the proceeds, interest expense, and the total cash payment at maturity if the Xander Company note above is (1) an interest bearing note or (2) a discounted note. Assume there are 360 days in a year.

	Interest Bearing Note	Discounted Note
Proceeds	$ _________	$ _________
Interest Expense	$ _________	$ _________
Payment at Maturity	$ _________	$ _________

Recording in the Accounting System

Journalize the issuance of the Xander Company interest bearing note on May 1.

May 1_(Cash | Notes Payable | Interest Expense | Bonds Payable | Depreciation Expense)__ $____ ______ __(Cash | Notes Payable | Interest Expense | Bonds Payable | Depreciation Expense)__ $____ ______

Journalize the cash payment on June 30, the due date, for the Xander Company interest bearing note. If an amount box does not require an entry, leave it blank.

June 30	_(Cash | Notes Payable | Interest Expense | Bonds Payable | Depreciation Expense)__ $____ ______ _(Cash | Notes Payable | Interest Expense | Bonds Payable | Depreciation Expense)__ $____ ______ _(Cash | Notes Payable | Interest Expense | Bonds Payable | Depreciation Expense)__ $____ ______

Journalize the issuance of the Xander company discounted note on May 1. If an amount box does not require an entry, leave it blank.

May 1___(Cash | Notes Payable | Interest Expense | Bonds Payable | Depreciation Expense)__		$____ ______
__(Cash | Notes Payable | Interest Expense | Bonds Payable | Depreciation Expense)__ $____ ______
__(Cash | Notes Payable | Interest Expense | Bonds Payable | Depreciation Expense)_ $____ ______

Journalize the cash payment on June 30, the due date, for the Xander Company discounted note.

June 30___(Cash | Notes Payable | Interest Expense | Bonds Payable | Depreciation Expense)___ $____ ______
___(Cash | Notes Payable | Interest Expense | Bonds Payable | Depreciation Expense)_____ $____ ______

Financial Statement Impact

On July 1, Heartsman issues a 60-day note to Blues National Bank for cash. Click here and use the sliders to select the relevant face amount and interest rate to answer the following questions.

1.	Determine the proceeds from issuing the note on July 1 if this is a 9% interest bearing note that has a face amount of $10,000.
	$____________

2.	Determine the amount of interest expense that will be reported in the December 31 income statement if this is a 9% interest bearing note that has a face amount of $10,000.
	$____________

3.	Determine the total amount of cash that Heartsman must pay at maturity if this is a 9% interest bearing note that has a face amount of $10,000.
	$____________

4.	Determine the proceeds of the note if this is a discounted note that has a $10,000 face amount and is discounted at 9%.
	$____________

5.	Determine the amount of interest expense if this is a discounted note that has a $10,000 face amount and is discounted at 9%.
	$____________

6.	Determine the total amount of cash that Heartsman must pay at maturity if this is a discounted note that has a $10,000 face amount and is discounted at 9%.
	$____________

7.	On the date of issuance, the proceeds from issuing an interest bearing note payable will be _(greater than | less than | equal to)__ the proceeds from issuing a discounted note payable with the same face amount, term, and interest rate.

8.	At maturity, the amount of cash that must be paid by the issuer of an interest bearing note payable will be ___(greater than | less than | equal to)____ the amount of cash that must be paid by the issuer of a discounted note payable with the same face amount, term, and interest rate.