Question

1. what is the difference between classification of a note as short term or long term?

2. at the beginning of year 1, B Co, has a note of $72,000 that calls for an annual payment of $16,246, which includes both principal and interest rate is 8 percent, what is the amount o finterewst expense in year 1 and in year 2? what is the balance of the note at the end of year 2?

3. What is the purpose of a line of credit for a buisness? why would a company choose to obtain a line of credit instead of issuing bonds?

16. what mechanism is used to adjust the stated interest rate to the market rate of interest?

18. what type of transaction is the issuance of bonds by a company?

Answer 1

1.Notes are classified into 2 categories

(1) Short term notes : Notes which mature within a period of one year or one operating cycle, whichever is longer.

It is used to satisfy an obligation to pay a certain sum within one year.

It is classified as current liability on balance sheet.

(2) Long term notes : Maturity must be longer than one year or one operating cycle.

It usualy takes 2 to 5 years to mature. And it is classifed as long term liability in balance sheet.

2. Interest Expense in Year 1

Value of note = $72,000

Interest Rate = 8%

$72,000 × 8% = $5760

  Interest Expense in year 2

( $ 72,000 + $5760^*1 - $16,246^*2) × 8% = $4921

  Note: *1 - Interest for year 1

*2 - Annual payment (given in question)

3.

Period	Principal	Payment	Interest @ 8%	Principal part in annual payment
1	$72,000	$ 16,246	$5760	$ 10,486
2	$61,514*	$ 16,264	$4921	$ 11,325
3	$50,189**

Note : * $72,000 + $5,760 - $16, 246 = $ 61,514

** $ 61,514 + $ 4,921 - $16,246 =$ 50,189