Question

Analyzing Interest-Bearing and Noninterest-Bearing Notes Consider the following three separate scenarios for a one-year, $300,000 note payable issued on September 1, 2020. Complete the table, using the straight-line method to amortize any discount on note payable. Note: Round your answers to the nearest whole dollar.

Answer 1

Solution:

$300,000 Note payable Non interest bearing 12% market rate Borrower's FYE: Dec.31 $ 267,857 300,000 $300,000 Note payable $300,000 Note payable 12% interest due at maturity 10% interest due at maturity 12% market rate 10% market rate Borrower's FYE*: Dec. 31 Borrower's FYE: Nov.30 Cash received upon note issuance 300,000 $ 300,000 Cash paid at maturity date 336,000 330,000 Total interest paid (Cash) 36,000 30,000 Interest expense in fiscal year 2020 (Sept. 1 to FYE) 12,000 7,500 Interest expense in fiscal year 2021 (FYE to Sept. 1,2021 24,000 22,500 Amount of liabilities reported on FYE 2020 balance sheet: Note payable (net) 300,000 300,000 Interest payable 12,000 7,500 10,714 21,429 289,286

Workings: Cash received upon note issuance (non-interest bearing ) = $300,000/(1.12) = $267,857 (rounded off)

Interest exp. in fiscal year 2020 for non interest bearing note payable = ($300,000-267,857)*4/12 = $10,714

Interest exp. in fiscal year 2021 for non interest bearing note payable = (300,000 - 267,857)*8/12 = $21,429

Note payable net (non-interest bearing) as on 2020 balance sheet = $300,000-10,714 = $289,286