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Debt Financing - Debt Financing LESSON TEN NOTES PAYABLE...

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Debt Financing LESSON TEN
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NOTES PAYABLE z The interest rate is an annual rate. z The interest cost must be prorated for the cost incurred during the accounting cycle and recorded in an adjusting entry.
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Notes Payable Interest = Principal x Rate x Time
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LONG-TERM NOTES PAYABLE z Your firm borrows $100,000 at 8% on October 1, 2003 for two years. The interest and principal are due at maturity. 2003 Oct 1 Cash 100000 Notes Payable 100000
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NOTE PAYABLE- EXAMPLE 1 Adjusting entry: 2003 Dec 31 Interest Expense 2000 Interest Payable 2000 100000 x .08 x 3/12 = 2000
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NOTES PAYABLE – EXAMPLE 1 Interest Expense Interest Payable Dr | Cr Dr | Cr 2000 | | 2000 2003
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NOTES PAYABLE – EXAMPLE 1 z Closing entry 2003 Dec 31 Retained Earnings 2000 Interest Expense 2000
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NOTES PAYABLE – EXAMPLE 1 Interest Expense Interest Payable Dr | Cr Dr | Cr 2000 | 2000 closing | 2000 2003
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NOTES PAYABLE – EXAMPLE 1 z Then, on December 31, 2004, we prepare another adjusting entry for the year of 2004. 2004 Dec 31 Interest Expense 8000 Interest Payable 8000 100000 x .08 = 8000
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NOTES PAYABLE – EXAMPLE 1 Interest Expense Interest Payable Dr | Cr Dr | Cr 8000 | | 2000 2003 | 8000 2004 10000
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NOTES PAYABLE – EXAMPLE 1 Closing Entry: 2005 Dec 31 Retained Earnings 8000 Interest Expense 8000
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