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

  2. Current Liabilities • Debts of a company that are paid with current assets. Debt that is paid off within a year

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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.

  9. 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 Discount 4,200.00 X .12 X 60/365 = 82.85 Face Value - Bank Discount = Proceeds 4,200.00 - 82.85 = 4,117.15

  10. 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?

  11. 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?

  12. Adjusting for Accrued Interest for a Noninterest Bearing Note On 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 = Interest 2,500 X .12 X 15/365 = 12.33

  13. Adjusting for Accrued Interest for a Noninterest Bearing Note On 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?