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Chapter 9

COMMERCE 1AA3 Chapter Notes - Chapter 9: Promissory Note, Current Liability, Interest Expense

Course Code
Aadil Merali Juma

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Businesses finance using debt or equity
Capital Structure: Mix of debt and equity
Debt cheaper but riskier, interest payments can force bankruptcy
Debt has advantage of financial leverage
o Owners can increase return on investments when using debt
Current Liabilities
Expected to be paid
o Within one year/operating cycle
o From current assets or using other current liabilities
Debts that do not meet both criteria are long-term
o Short-term debt that is expected to be refinanced is not included
Two Types:
o Known: ex. A/P, N/P, notes payable
o Estimated: ex. Contingent liabilities, warranties
Amount owned for goods/services/supplies purchased on open account
30-60 days, no set date
Notes Payable
Written promise to pay sum of money on specific date
Issuer = Borrower
Can arise from any transaction
Short-term or long-term
May be interest-bearing or zero-interest-bearing
o Interest-bearing notes have interest printed on note
Interest expense determined when financial statements prepared
Interest Bearing Notes
Interest rate stated on note
Payments can be for:
o Interest only
o Fixed principal and interest on remaining balance
o Equal payments of interest and principal
Interest Only
Interest expense each month
Blended Interest and Principle
Pay set amount each year
Pay interest on carrying value first, then principal
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