COMMERCE 1AA3 Chapter Notes - Chapter 9: Promissory Note, Current Liability, Interest Expense
30 Nov 2016
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Capital structure: mix of debt and equity. Debt cheaper but riskier, interest payments can force bankruptcy. Debt has advantage of financial leverage: owners can increase return on investments when using debt. Expected to be paid: within one year/operating cycle, from current assets or using other current liabilities. Debts that do not meet both criteria are long-term: short-term debt that is expected to be refinanced is not included. Amount owned for goods/services/supplies purchased on open account. Written promise to pay sum of money on specific date. Interest only: fixed principal and interest on remaining balance, equal payments of interest and principal. Pay interest on carrying value first, then principal. Debit difference between note and cash, discount on note payable. Adjusting/paying: debit interest expense, credit discount on note payable. Portion of long term debt that will be paid within 12 months. Not recorded as current if: retired using long-term assets, refinanced, converted into share capital. When cash received before product delivered/service performed.
