0 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 26, Section 2 Notes Payable and Receivable What Do You Think? What do the terms interest-bearing and non-interest-bearing mean?

1 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Main Idea Businesses issue and accept two types of notes: interest-bearing notes and non-interest-bearing notes. You Will Learn  what an interest-bearing promissory note is.  why a “non-interest-bearing” note does have interest expense. Notes Payable SECTION 26.2

2 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms  long-term liabilities  interest-bearing note payable  non-interest-bearing note payable  bank discount  proceeds  other expense Notes Payable SECTION 26.2

3 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Interest-Bearing Notes Payable Notes issued by a business are recorded in Notes Payable, a liability account. Long-term liabilities are debts that become due after one year. An interest- bearing note payable requires the principle plus interest to be paid on the maturity date. Notes Payable SECTION 26.2

4 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording the Issuance of an Interest-Bearing Note Payable Here is an example of how to record an interest-bearing note payable. Notes Payable SECTION 26.2

5 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording the Issuance of an Interest-Bearing Note Payable Notes Payable SECTION 26.2

6 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording the Payment of an Interest-Bearing Note Payable Here is an example of how to record the payment of an interest-bearing note payable. Notes Payable SECTION 26.2

7 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording the Payment of an Interest-Bearing Note Payable Notes Payable SECTION 26.2

8 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Non-Interest-Bearing Notes Payable A non-interest bearing note payable is a note in which the interest is deducted from the face value of the note when it is issued. It is called “non-interest bearing” because no interest rate is stated on the note. The interest deducted in advance is the bank discount. The cash received by the borrower is called the proceeds. For this type of note, the maturity value is the same as the face value.. Notes Payable SECTION 26.2

9 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Calculating Non-Interest-Bearing Notes Payable The proceeds for this non-interest-bearing note, discounted at 12%, are $1, ($1, $44.38). Face Value x Discount Rate x Time = Bank Discount $1, x 0.12 x 90/365 = $44.38 Notes Payable SECTION 26.2

10 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording the Issuance of a Non-Interest-Bearing Note Payable The bank discount is recorded in a contra liability account called Discount on Notes Payable. The normal balance of Discount on Notes Payable is a debit. This transaction records the issuance of the non- interest-bearing note. Notes Payable SECTION 26.2

11 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Notes Payable SECTION 26.2

12 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Recording the Payment of a Non-Interest- Bearing Note Payable When a non-interest-bearing note payable matures, the amount of the bank discount is recorded as an expense. Record a matured note using two separate journal entries or a compound entry:  the payment of the non-interest-bearing note payable, and  the interest expense The interest Expense account is classified as an other expense, which is a nonoperating expense. It appears on the income statement below operating income. Notes Payable SECTION 26.2

13 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  long-term liabilities Debts that are not required to be paid within the next accounting period.  interest-bearing note payable A note that requires the face value plus interest to be paid on the maturity date.  non-interest-bearing note payable A note from which the interest is deducted in advance from the face value of the note; no interest rate is stated on the note. Notes Payable SECTION 26.2

14 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved. Key Terms Review  bank discount The interest charge deducted in advance on a non-interest-bearing note payable.  proceeds The cash actually received by the borrower on a non-interest-bearing note payable.  other expense A nonoperating expense; an expense that does not result from the normal operations of the business. Notes Payable SECTION 26.2