Question

A 4-year, 8%, $40,000 notes payable was issued on January 1, Year 1. The maker is required to pay $10,000 plus interest on December 31 of every year for the next four years. What amount, if any, should be reported as a current liability on January 1, Year 2?

A :

zero; the note is a long-term liability

B :

$13,200

C :

$39,600

D :

$10,000

Answer 1

• Jan 1 Year 2 Current Liability = 31 Dec Year 1 Current Liability.

This will include that part of Notes Payable that is to be repaid in the year 2.

• Working:

	Beginning Principal Outstanding	Interest expense	Principal repaid	Principal Outstanding
	[A]	[B = A x 8%]	[C]	[D = A - C]
31 Dec Year 1	$                           40,000	$                          3,200 [paid on 31 Dec Year 1]	$                        10,000	$                30,000
31 Dec Year 2	$                           30,000	$                          2,400 [will be paid on Dec 31, Year 2]	$                        10,000 [will be paid on Dec 31, Year 2]	$                20,000
31 Dec Year 3	$                           20,000	$                          1,600	$                        10,000	$                10,000
31 Dec Year 4	$                           10,000	$                              800	$                        10,000	$                          -

• Outstanding balance of Notes Payable on Jan 1 Year 2 = $ 30,000

Out of this $ 30,000, $ 10,000 is to be repaid on Dec 31, Year 2, which is within this year.

Hence, this $ 10,000 will form part of Current Liability.

• Correct Answer = Option ‘D’ $ 10,000