© 2014 Cengage Learning. All Rights Reserved. Learning Objectives What options does a business have if they cannot pay their monthly expenses? © 2014 Cengage Learning. All Rights Reserved.

LOANS Why do businesses/people take out loans? LESSON 20-1 4/22/2018 LOANS Why do businesses/people take out loans? What is the cost of taking out a loan? What is the difference between: Credit Cards Loans Notes LESSON 20-1

Basic Types of Loans Student Loans Debt Consolidation Automobile Personal Mortgage Home Equity Secured Unsecured Short-term Long-term Soft Subprime Discounted Policy loan Lender of Last Resort Federal Reserve bailing out a large corporation LESSON 20-1

Short-Term Debt Financing Options Lesson 18-1 Short-Term Debt Financing Options debt financing: Obtaining capital by borrowing money Note: Short Term Loan (less than a year) line of credit: A bank loan agreement that provides immediate short-term access to cash Loan that stays open for years Instant cash flow Monthly/yearly bank fees Debt

Drawing on a Line of Credit Lesson 18-1 Drawing on a Line of Credit November 14. Drew $15,800.00 on its line of credit. Receipt No. 912. Line of Credit is a liability account 1 Date 2 Account Title 3 Receipt Number 4 Amount Borrowed 5 Cash Received

Promissory Note Terms Promissory Note: Loan, usually short-term, but could be long. Written promise to pay back money on a specific date Principle: Amount of cash borrowed Rate: Percentage of interest paid to borrow loan Time: Length of days/months/years loan will be out Interest: Cost of borrowing money Principle X Rate X Time (in years) Maturity Date: The date the loan must be paid off Notes Payable: Liability Account used for notes LESSON 20-1

Signing a Promissory Note for an Extension of Time Lesson 18-1 Signing a Promissory Note for an Extension of Time September 30. Sun Treasures signed a 60-day, 12% note to Hass, Inc., for an extension of time on its account payable, $4,200.00. Memorandum No. 142. Note Payable is a liability account. 1 Debit Accounts Payable and Vendor’s Account 2 Credit Notes Payable

Paying Principal and Interest on a Loan Lesson 18-1 Paying Principal and Interest on a Loan Interest incurred on borrowed funds is called interest expense. Will be paid when the note or line of credit is paid Principal X Rate X Time

MATURITY DATE OF PROMISSORY NOTES May 18, 90-Day Note May18–May 31 13 days June 30 days July 31 days August 1–August 16 16 days Total 90 days The date the note is written is not counted, but the maturity date is counted. LESSON 20-1

INTEREST ON PROMISSORY NOTES Interest for One Year Interest for One Year = Time in Years × Interest Rate Principal $20,000.00 × 6% × 1 = $1,200.00 Interest for Fraction of Year Interest for Fraction of Year = Time as Fraction of Year × Interest Rate Principal $20,000.00 × 6% × 90 360 = $300.00 LESSON 20-1

INTEREST ON PROMISSORY NOTES page 590 Maturity Value Maturity Value = Interest + Principal $20,000.00 + $300.00 = $20,300.00 LESSON 20-1

Paying Principal and Interest on a Promissory Note Lesson 18-1 Paying Principal and Interest on a Promissory Note LO2 November 29. Paid cash for the maturity value of the August 30 note: principal, $4,200.00, plus interest, $84.00; total, $4,284.00. Check No. 751. 4,200.00 Notes Payable Nov. 29 84.00 Interest Expense Principal × Annual Interest Rate Time as Fraction of a Year = Interest for Fraction of Year $4,200.00 12% 60/360 $84.00 Cash Nov. 29 4,284.00 1 Account Title 3 Principal Amount 5 Cash Paid 2 Account Title 4 Interest Amount