Question

Juniper Bush Farm has a December 31 fiscal year end. The company has six notes payable outstanding on December 31, 2014, as follows: 1. A nine-month, 5%, $25,000 note payable issued on July 1, 2014. Interest is payable monthly on the first day of each month starting on August 1. 2. A six-month, 4%, $10,000 note payable issued on September 1, 2014. Interest and principal are payable at maturity. 3. A seven-month, 4.5%, $40,000 note payable issued on November 1, 2014. Interest and principal are payable at maturity. 4. A five-year, 3.75%, $80,000 note payable issued on May 31, 2014. Juniper Bush Farm is required to pay $16,000 plus interest on May 31 each year starting in 2015. 5. A three-year, 4.25%, $126,000 note payable issued on October 1, 2014. Juniper Bush Farm is required to pay $3,500 plus interest on the first day of each month starting on November 1, 2014. All payments are up to date. 6. A four-year, 5%, $50,000 note payable issued on March 31, 2013. Juniper Bush Farm is required to pay $12,500 every March 31 starting in 2014. Interest is payable monthly at the end of the month, starting on April 30, 2013.

Instructions

(a) Calculate the current portion of each note payable.

(b) Calculate the non-current portion of each note payable.

(c) Calculate any interest payable at December 31, 2014. TAKING IT FURTHER What are the costs and benefits to the maker and the payee of the note of using a note payable in place of an account payable?

Answer 1

Answer:

						(a)		(b)		(c)
	Principal	Date issued	Rate	Term	Current Portion		Non-current Portion		Interest Payable
1	$   25,000	July 1/14	5.00%	9	months	$  25,000		$            -		$   104.17	1
2	$   10,000	Sept. 1/14	4.00%	6	months	$  10,000		$            -		$   133.33	2
3	$   40,000	Nov. 1/14	4.50%	7	months	$  40,000		$            -		$   300.00	3
4	$   80,000	May 31/14	3.75%	5	years	$  16,000		$   64,000		$1,750.00	4
5	$ 126,000	Oct. 1/14	4.25%	3	years	$  42,000	7	$   77,000	8	$   421.46	5
6	$   50,000	Mar. 31/13	5.00%	4	years	$  12,500		$   25,000	9	$            -	6

¹      $104.17 = $25,000 × 5.0% × 1/12                                               ⁷      current: $42,000 = $3,500 × 12 months

²      $133.33 = $10,000 × 4.0% × 4/12                                               ⁸        non-current: $77,000 = $126,000 – ($3,500 × 2)

³      $300.00 = $40,000 × 4.5% × 2/12                                                                                                             – $42,000

⁴      $1,750.00 = $80,000 × 3.75% × 7/12                                          ⁹        non-current: $25,000 = $50,000 – ($12,500 × 2)

⁵      $421.46 = ($126,000 – [2 × $3,500]) × 4.25% × 1/12

⁶      Interest was paid on December 31, 2014

Taking It Further:

For the maker, a note payable bears interest, which is an additional cost. Some liabilities, such as accounts payable to suppliers, are usually non-interest bearing as long as they are paid within the credit period. In addition, the term of the note may call for periodic payments of interest. This adds to the administrative burden of managing the note. The benefit to the maker is that the terms of the note are usually negotiated with the payee and the interest rate is more favourable than financing obtained through a bank. If the note is used to pay a supplier, the term of the note gives the maker additional time to repay the principal.

For the payee, the note provides a stream of interest revenue. Because it is a signed document, it also provides additional security of collection. The cost to the payee is that cash is not received until the note reaches maturity.