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(Figure)Whole Leaves wants to upgrade their equipment, and on January 24 the company takes out a loan from the bank in the amount of $310,000. The terms of the loan are 6.5% annual interest rate, payable in three months. (Figure)Airplanes Unlimited purchases airplane parts from a supplier on March 19 at a quantity of 4,800 parts at $12.50 per part. Airplanes pays one-third of the amount due in cash on March 30 but cannot pay the remaining balance due. The supplier renegotiates the terms on April 18 and allows Airplanes to convert its purchase payment into a short-term note, with an annual interest rate of 9%, payable in six months.
What is Accounts Payable? Definition, Recognition, and Measurement, Recording, Example
This shorter payback period is also beneficial with amortization expenses; short-term debt typically does not amortize, unlike long-term debt. An interest-bearing note payable may also be issued on account rather than for cash. In this case, a company already owed for a product or service it previously was invoiced for on account. Rather than paying the account off on the due date, the company requests an extension and converts the accounts payable to a note payable.
Based on the information provided by Empire Construction Ltd. management, the bank estimated that it was probable that it would receive only 75% of the 2023 balance at maturity. If a debtor runs into financial difficulties and is unable to pay, or fully repay, the note, the estimated impaired cash flows become an notes payable journal entry important reporting disclosure for the lender. If the lender can reasonably estimate the impaired cash flows an entry is made to record the debt impairment. The impairment amount is calculated as the difference between the carrying value at amortized cost and the present value of the estimated impaired cash flows.
Short-term and long-term notes payable:
This results in a faster reduction in the principal amount owing as compared with scenario 2. Short-Term Notes Payable decreases (a debit) for the principal
amount of the loan ($150,000). Interest Expense increases (a debit)
for $4,500 (calculated as $150,000 principal × 12% annual interest
rate × [3/12 months]).