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Interest-Bearing Notes in Financial Accounting
One way a firm borrows funds is by signing an interest-bearing note. A bank or other lender will loan the face amount, or principal, of the note for a specified period. The borrower will then pay interest periodically and repay the principal when the note becomes due (or at its maturity date). If Random Enterprises, Inc., for example, borrows $10 million at the beginning of 2000 for two years at a market interest rate of 12% per year, the financial statements would reflect the following events.
Upon receipt of the loan proceeds at the beginning of 2000, cash and long-term notes payable are each increased by $10 million:
In each of the years 2000 and 2001, as the periodic interest payments are made, cash is decreased by $1.2 million ($10 million 12% $1.2 million) and interest expense is recognized.
When the loan is repaid at maturity at the end of 2001, cash and long-term notes payable are each decreased by $10 million:
The net result of these three transactions is that $10 million cash has been borrowed, and later $12.4 million was repaid. The firm has incurred interest expense of $1.2 million each year, or a total interest expense of $2.4 million, for the privilege of using the $10 million for two years.
Noncurrent Liabilities Topics
Bonds Payable (Long-Term Bonds Payable)
- Issuance of Bonds at Par
- Sale or Issuance of Bonds at a Discount
- Sale or Issuance of Bonds at a Premium
- Early Retirement of Bonds
- Aspects of Borrowing Agreements
Financial Reporting for Income Taxes
