Question

if we issue a zero interest bearing note payable that has a term of 4-months, how would we record it? Assume we issue at $102,000 a 4-month, zero-interest bearing note to ABC, National Bank. The present value of the note is $100,000. How would we show the note on our financial statements before we pay it off?

Answer 1

ZERO INTEREST BEARING OR NON-INTEREST BEARING NOTES PAYABLE

These notes are business instruments used to borrow cash and repay within the stipulated time mentioned in the notes. It is a kind of promissory note category sans the interest being mentioned explicitly. These notes are issued at a Face Value (FV) against which the money is lent or borrowed by the business, the money lent or borrowed by the business is the Cash Value (CV). The difference between the FV and CV is treated as interest. This interest will be amortized over the period of the validity of the instrument.

Eg. FV = $102,000 and CV = $100,000.

Now Interest will be I = FV – CV ($102,000 – $100,000 = $2,000)

This $2,000 will be amortized over the period of time of the instrument.

ACCOUNTING ENTRIES FOR ZERO-INTEREST NOTES

Journal Entries in the books of the Issuer

Particulars	Debit	Credit
At the Time of Issue – Zero Interest Notes Receivable Issued at Discount
Notes Receivable (ABC National Bank)               Dr.	$102,0000
To Cash Account		$100,000
To Discount on Notes Receivable		$2,000
(Being Zero Interest bearing notes receivable issued at discount)
Zero Interest Notes Receivable – Interest Amortization
Discount on Notes Receivable                              Dr.	$500
To Interest Income		$500
(Being Interest amortized on monthly basis, $102,000 – $100,000 = $2,000. $2,000/4months = $500/month)
At the Time of Repayment – Zero – Interest Notes Receivable Issued at Discount
Cash Account                                                           Dr.	$102,000
To Notes Receivable (ABC National Bank)		$102,000
(Being Zero Interest notes receivable paid in full and redeemed)

Journal Entries in the books of the Receiver

Particulars	Debit	Credit
At the Time of Receiving – Zero Interest Notes Payable Issued at Discount
Cash Account                                                         Dr.	$100,0000
Discount on Notes Payable                                  Dr.	$2,000
To Notes Payable		$102,000
(Being Zero Interest bearing notes payable at discount)
Zero Interest Notes – Interest Amortization
Interest Expense                                                      Dr.	$500
To Discount on Notes Payable		$500
(Being Interest amortized on monthly basis, $102,000 – $100,000 = $2,000. $2,000/4months = $500/month)
At the Time of Repayment – Zero Interest Notes Payable Issued at Discount
Notes Payable                                                          Dr.	$102,000
To Cash Account		$102,000
(Being Zero Interest notes payable paid in full and redeemed)

REFLECTION IN THE FINANCIAL STATEMENTS

PROFIT & LOSS ACCOUNT OF THE ISSUER

Income	Expenditure
Particulars	Amount	Particulars	Amount
Interest income from Notes Receivable	$500*

* Note: This is a representation of one month's income and expenditure statement.

PROFIT & LOSS ACCOUNT OF THE RECEIVER

Income	Expenditure
Particulars	Amount	Particulars	Amount
		Interest income from Notes Payable	$500*

* Note: This is a representation of one month's income and expenditure statement.

BALANCE SHEET OF THE ISSUER

ASSETS	LIABILITIES
Particulars	Amount	Particulars	Amount
Current Assets*
Interest income from Notes Receivable	$102,000

* Note: The Zero interest rate note is treated as a short-term asset, hence categorized as Current Assets

BALANCE SHEET OF THE RECEIVER

ASSETS	LIABILITIES
Particulars	Amount	Particulars	Amount
		Current Liabilities*
		Interest income from Notes Payable	$102,000

* Note: The Zero interest rate note is treated as a short-term liability, hence categorized as Current Liabilities.