Accounting for Liabilities & Notes Payable Flashcards

Accounting for Liabilities & Notes Payable Flashcards
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Non-Interest Bearing Note

Businesses that get this type of note have to account for implied interest using a discount rate. You must utilize a Discount on Notes Payable account with this kind of note.

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Interest Bearing Note

The type of note that accrues interest over time that you must pay. The record for this in your Notes Payable will be the same as for a non-interest bearing note.

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Finding the Discount Rate: Steps

Interest Rate x (Months Until Loan is Due / Months in the Year) = Discount Rate

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Determining the Payout for a Non-Interest Bearing Loan: Steps

Note Payable x Discount Rate = Discount Amount

Note Payable - Discount Amount = Initial Loan Payout

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Long-Term Liabilities: Mortgage Payments

The loan payments that you will not repay within one year. These are the payments that make up the rest of the life of the loan.

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Current Liabilities: Mortgage Payments

These are payments that are due within a year. For example, if you have to pay $100 toward your loan every month, your total payment for this type of liability would be $1,200.

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Operating Lease

If you have this kind of lease, you rent equipment for a given amount of time and then return it to the lessor once the lease expires. You have no rights related to ownership.

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Capital Lease

Businesses that take out this type of lease will keep their equipment after the lease ends. They gain ownership over it.

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Vesting

This factor determines how long an employee has to work for a company before he or she qualifies for a pension.

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19 cards in set

Flashcard Content Overview

Working with the flashcards in this set can help you go over the differences between interest bearing and non-interest bearing notes. You'll be able to consider bonds and the present value of money. Capital leases and operating leases are also addressed by these cards. Additionally, you can focus on annuities and how to determine the implicit annual rate of interest on a note.

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Back
Vesting

This factor determines how long an employee has to work for a company before he or she qualifies for a pension.

Capital Lease

Businesses that take out this type of lease will keep their equipment after the lease ends. They gain ownership over it.

Operating Lease

If you have this kind of lease, you rent equipment for a given amount of time and then return it to the lessor once the lease expires. You have no rights related to ownership.

Current Liabilities: Mortgage Payments

These are payments that are due within a year. For example, if you have to pay $100 toward your loan every month, your total payment for this type of liability would be $1,200.

Long-Term Liabilities: Mortgage Payments

The loan payments that you will not repay within one year. These are the payments that make up the rest of the life of the loan.

Determining the Payout for a Non-Interest Bearing Loan: Steps

Note Payable x Discount Rate = Discount Amount

Note Payable - Discount Amount = Initial Loan Payout

Finding the Discount Rate: Steps

Interest Rate x (Months Until Loan is Due / Months in the Year) = Discount Rate

Interest Bearing Note

The type of note that accrues interest over time that you must pay. The record for this in your Notes Payable will be the same as for a non-interest bearing note.

Non-Interest Bearing Note

Businesses that get this type of note have to account for implied interest using a discount rate. You must utilize a Discount on Notes Payable account with this kind of note.

Determining Interest on an Interest Bearing Note: Steps

Loan Amount x (Interest Rate x (Months Until Loan is Paid / Months in the Year))

Interest Bearing Note: Records at Time of Borrowing

Debit the Cash account for the full amount.

Credit the Notes Payable account for the same amount.

Interest Bearing Note: Records at Time of Repayment

Debit the initial loan amount from Notes Payable.

Debit the interest from Interest Expense.

Credit the total of the initial amount and the interest to Cash.

Non-Interest Bearing Note: Records at Time of Borrowing

Debit the Cash account for the loan's proceeds.

Debit Discount on Notes Payable for the difference between the proceeds and the maturity value.

Credit Notes Payable the maturity value.

Non-Interest Bearing Note: Records at Time of Repayment

Debit the Notes Payable account the maturity value.

Credit the Cash account the maturity value.

Determining the Implicit Annual Rate of Interest: Steps

Note Payable - Initial Loan Payment = X

X / Note Payable = Discount Rate

Discount Rate / (Months Until Loan Repayment / Months in the Year) = Implicit Annual Rate of Interest

Bond

A type of annuity that may be purchased by investors, who then get regular payments of interest. You generally record the present value of these as a long-term liability on your balance sheet.

Determining the Issue Price of a Bond: Steps

Initial Bond Price x Factor for Bond Term = A

Annual Interest Rate x Factor for Interest Rate = B

A + B = Bond's Issue Price

Present Value

This represents how much a bond is worth right now after taking into consideration any discounts associated with the interest rate. It shows how much future cash flows are currently worth.

Annuity

This refers to a series of payments made over a period of time. Interest payments would be an example of this.

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