Short-term notes
• LO13–2
The following selected transactions relate to liabilities of United Insulation Corporation. United’s fiscal year ends on December 31.
Required:
Prepare the appropriate
2018 | |
Jan. 13 | Negotiated a revolving credit agreement with Parish Bank that can be renewed annually upon bank approval. The amount available under the line of credit is $20 million at the bank’s prime rate. |
Feb. 1 | Arranged a three-month bank loan of $5 million with Parish Bank under the line of credit agreement. Interest at the prime rate of 10% was payable at maturity. |
May 1 | Paid the 10% note at maturity. |
Dec. 1 | Supported by the credit line, issued $10 million of commercial paper on a nine-month note. Interest was discounted at issuance at a 9% discount rate. |
31 | Recorded any necessary |
2019 | |
Sept. 1 | Paid the commercial paper at maturity. |
Long-term notes payable: Long-term notes payable represent a legal and written promise made by the business to pay a debt with interest over a period of more than a year. It is reported under the long-term liability section of the balance sheet.
Current portion of long-term notes payable: The principal amount of notes payable which would be paid within one year is called as current portion of long-term notes payable. The current portion of long-term notes payable is reported as a current liability.
To prepare: Necessary journal entries through the maturity of each liability.
Explanation of Solution
On January 13, 2016, there is no entry to be made because the loan is not made from the line of credit.
Record borrowing of cash on 10% notes payable.
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2016 | Cash | 5,000,000 | |||||
February | 1 | Short-Term Notes Payable | 5,000,000 | ||||
(To record the borrowed of cash on 10% notes payable.) |
Table (1)
- Cash is an asset and is increased by $5,000,000 due to borrowing of cash on 10% notes payable. Thus, debit cash with $5,000,000.
- Short-term notes payable is a liability and is increased by $5,000,000 as borrowed cash on notes payable. Thus, credit short-term notes payable with $5,000,000.
Record payment of 10% notes payable at maturity.
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2016 | Interest Expense | 125,000 | |||||
May | 1 | Short-Term Notes Payable | 5,000,000 | ||||
Cash | 5,125,000 | ||||||
(To record the payment of 10% notes payable at maturity.) |
- Interest expense is an expense and decreases the stockholders’ equity. Thus, debit Interest expense with $125,000.
- Short-term notes payable is a liability and is decreased by $5,000,000 due to payment made. Thus, debit short-term notes payable with $5,000,000.
- Cash is an asset and decreased due to payment made. Thus, credit Cash with $5,125,000.
Working notes:
Calculate interest expense for 3 months (February to April) on 10% note.
Record the payment of 10% notes payable at maturity.
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2016 | Cash | 9,325,000 | |||||
December | 1 | Discount on Notes Payable | 675,000 | ||||
Notes payable | 10,000,000 | ||||||
(To record the notes issuance at 9% discounted rate.) |
- Cash is an asset and is increased due to issuance of note. Thus, debit cash account with $9,325,000.
- Discount on notes payable is a contra liability and is increased. Thus, debit discount on notes payable account with $675,000.
- Notes payable is a liability and is increased by $10,000,000 as borrowed cash on notes payable. Thus, credit notes payable with $10,000,000.
Working note
Calculate the amount of discount on notes payable (commercial paper).
Record the interest expense for 1 month.
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2016 | |||||||
December | 1 | Interest expense | 75,000 | ||||
Discount on Notes Payable | 75,000 | ||||||
(To record the interest expense for 1 month.) |
- Interest expense is an expense and decreases the stockholders’ equity. Thus, debit Interest expense with $75,000
- Discount on notes payable is a contra liability and is decreased due to payment of interest expense. Thus, credit discount on notes payable account with $75,000.
Working note
Calculate the interest expense for 1 month (December) on commercial paper.
Record the interest expense for 8 months.
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2017 | |||||||
September | 1 | Interest expense | 600,000 | ||||
Discount on Notes Payable | 600,000 | ||||||
(To record the interest expense for 1 month.) |
- Interest expense is an expense and decreases the stockholders’ equity. Thus, debit Interest expense with $600,000
- Discount on notes payable is a contra liability and is decreased due to payment of interest expense. Thus, credit discount on notes payable account with $600,000.
Working note
Calculate the interest expense for 8 months (January to August) on commercial paper.
Record the payment of commercial paper at maturity.
Date | Accounts and Explanation | Post Ref | Debit ($) | Credit ($) | |||
2017 | |||||||
September | 1 | Notes payable | 10,000,000 | ||||
Cash | 10,000,000 | ||||||
(To record payment of commercial paper at maturity.) |
- Notes payable is a liability and is decreased by $10,000,000 as payment is made at maturity. Thus, debit notes payable with $10,000,000.
- Cash is an asset and decreased due to payment made. Thus, credit cash accounts with $10,000,000
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Chapter 13 Solutions
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