All right. So here we are with a notes
payable example
and in this one it says sierra company
borrowed a hundred thousand dollars
from tango company uh on september 1st
after they signed a one or excuse me a
nine month note
and agreed to pay eight percent interest
sierra paid off the loan plus the
interest in full
on the date of its maturity journalized
all the relevant events, so again we're
going to do is much like
the notes receivables example that we
did back in chapter seven
we're going to do this one three times
three different examples and it's going
to look very very familiar
the computation the calculations are
going to be very similar we're just
changing really the
the journal entries that's the only
difference that we're going to have,
so let's get into it. First things
first we need to journalize
us getting the loan borrowing the loan
so we're getting cash so
9-1 we're going to debit cash for the
100 000
because that's our principal and then
we're also going to credit notes payable
because we're increasing our liability
by a hundred thousand, all right, that
takes care of us just getting the note
in and of itself then if we have any
other yearly operational
entries that will go there and then we
get to 12 31 because remember just like
we did with notes receivable
if it goes past december 31st we need to
stop on december 31st and do an
adjustment for what we have either
accrued or we have used um or built up,
and so 12 31 is our adjustment date so
we need to calculate how much of this
interest have we accrued how do we do
that what is our
equation. Principal amount
times the interest rate times the time
expressed in a fraction of a year and
that's going to give us
our total interest, again it's the exact
same equation that we did for
notes receivable. Okay. So what is our
principal amount what's a
100 000, what is our interest rate that's
eight percent,
what is the time expressed in a fraction
of a year well this is a nine month note
so we need to do nine over twelve
if this was a one year then we would do
twelve over twelve which was is
irrelevant but
just to do it for formality reasons but
this one's nine months we'll do nine momths
nine months over 12 months and that will
give us a total interest
of six thousand. So by the end of the the
life of this note
by the end of the nine months we will
have accrued six thousand dollars of
interest
but that's not how much we've accrued up
to december 31st
we need to figure out how much we've
accrued just up to december 31st, so how
do we do that,
we take the total interest that we found
multiply it by the amount of time
from start date to december 31st and
that will give us our interest
incurred by december 31st, so our total
interest is six thousand,
the total amount of time uh from the
start date which is
september first to december 31st that's
going to be four months
of the nine months total so we'll do
four over nine and that will give us an
interest incurred just by december 31st
of 2667.
So now that we know how much we've
incurred or accrued
up this point december 31st we can do
our journal entry,
which is going to be interest expense
because we're expensing this now this is
us using this this is what we have to
pay in order to use the loan,
interest expense of 2667 and then
interest payable because we'll pay it
back
uh when it's due of 2667 as the credit,
that takes care of uh the
12 31 adjustment. Now let's look at year
two, year two comes around now we're at
six one that's the end of the nine
months
uh so we now need to pay it but in order
for us to pay it we need to figure out
what the remaining
interest is and again the easy way to do
it is six thousand minus the 2667 but
again just using it for computational
purposes here's the equation,
again total interest times the amount of
time from january first to the maturity
date
that'll give us remaining interest
incurred, so again total interest is six
thousand,
uh the remaining time is the remaining
five months of the nine so we'll do five
over nine
and then that will give us a remaining
interest of
3333. Again if you add that to the 2667
that will give you the 6 000.
All right. So now let's do our journal
entry now that we have all this
information
well we know cash is involved let's go
ahead and get that out of the way cash
we're losing the cash because we're
paying it so we're gonna go ahead and
credit cash
for one thousand six hundred excuse me
one hundred that six
thousand because that is the one hundred
thousand principal plus the total six
thousand in interest
so that's what we're paying, and by
paying it what are we getting rid of
what is our debits going to be well
we're getting rid of our principal which
is our notes payable
so we'll go ahead and debit notes
payable of 100 000.
We're also getting rid of what we have
in interest payable
which right now all we have in interest
payable is 2667 so we'll take that
out, and then we have that last three
thousand three hundred and thirty three
that's going to be an expense because we
haven't expensed that yet we still need
to expense it because this is in the
second year so we'll call that interest
expense
of three thousand three hundred thirty
three,
that's how you do a uh a notes payable
example
when it starts in one year and finishes
the maturity date is in the following
year.
Now let's look at an example of what
happens if it just all happens in one
year.
So pretty much the same stuff going on
except this time
the note starts on january 1st and it's
a nine month note
so let's go ahead and do the journal
entry for us getting the money, so again
it's going to be 1-1
cash of 100 000 notes payable of under
thousand
then we have our normal yearly
operational entries and then we get to
ten
one ten one is when the maturity date
would be again nine months
note so it would uh mature on
ten one so we need to do the journey or
journal entry and 10 1 is when we
actually are paying this so
same equation principal amount times the
interest rate times the time expressed
in a fraction of your gives you your
total interest,
so let's put in those numbers 100 000
for the principal amount,
uh eight percent for the interest rate,
nine over twelve for the time expressed
in years, and that will give us the same
six thousand
but this time we're not having to divide
it up because notice we're not going
past
12 31 we're still within the same year.
So with that we don't have to put
anything in payables so
we're going to lose the cash we'll go
ahead and credit cash for
the principal amount plus the interest
so 106 000.
Go ahead and get rid of the notes
payable principal amount so
debit notes payable four hundred
thousand, and then finally the last six
thousand we're just going to put an
interest expense because we haven't
we don't have an interest payable this
is all within the same year so we don't
have a payable
we're just going to expense it outright
all at once. So that's how you handle
a notes payable example when it's all
within one year,
Now I'm going to give you one more
example much like we did with the notes
receivable
is what happens if it's within days, so
let's look at one more
example. Sierra company bar the same
amount but this time it's for a 45 day
note and it started on december 1st.
Okay. So again december 1st cash
notes payable 100 000 that's our
principal amount,
any other yearly operations until we get
to 12 31 this one passes the 12 31 mark
45 days from december uh first would
give you january 15th
if you break out your calendar you count
the days you remember you start with
december 2nd
and so that'll get you to january 15th
but we need to stop as
of december 31st, so again same equation
uh 100 000 is the principal amount
10 is going to be the interest rate for
this one.
Time express and a fraction of a year
remember this is a 45 day note and
because it's in days
we're going to divide it by 360. we're
going to use the banker's rule we're
going to assume that the
year has 360 days rather than 365
because it's going to give us a nicer
fraction
and that will give us a total interest
of one thousand
two fifty, now that's not what we're
gonna account for yet because we haven't
got all that
we haven't incurred all that 1250 this
is for the that's for the full 45 days
we're only doing it for a portion of it,
so we got to break that down so we'll
use the equation again total interest
times the amount of time
from the start date to december 31st and
that will give us the interest incurred.
So 1250 if you break out your
calculator and count
december 2nd starting with december 2nd
to december 31st I'll give you 30 days
so we will do 30 divided by 45 because
that's how much of it we've actually
used,
that will give me 800 roughly 833, so we
can go ahead and write that in our
journal entry as
interest expense of 833 and then
interest payable
of 833. All right. That takes care of the
adjustment for the entries that we've
incurred
now let's go into year two where we
actually paid off,
so january 15th occurs this is again the
end of its maturity date
so I need to figure out that last little
bit of interest again you can do 1250
minus 833
I'll give you the answer but again from
an equations base
it'll be 12 050
times the remaining 15 days out of the
45 days
and that will give you the remaining 417.
So if I put that into a journal entry
first things first I'm getting rid of
cash because I'm having to pay it away
because this is the money that I've
borrowed so now I've got to pay it back
so cash is going to go down
credit cash of the total amount of the
principal plus the total interest which
was the 1250, so 100 000
plus the 12.50 gives me 101 250,
and my debits are going to be my
principal I'm getting rid of it I don't
owe that anymore so notes payable
debit of 100 000, interest payable
because I got to get rid of that or I'm
getting rid of that interest payable of
the
833 that I have so far, and the remaining
417
is still going to be expense because I
haven't expensed it yet,
so it's going to be 417 into interest
expense.
So that's how you do three examples of
notes payables
hopefully they made sense you'll have a
good.