A note straddling year end; maturity with the accrual cleared; the loan schedule’s next row

A note that crosses the year end

On 1 November Northlake Nordic Centre Inc. buys a used snowmobile fleet for 50,000, signing a six-month, 5 % note — principal and interest due 1 May. The purchase is an asset financed by a note: Dr Equipment 50,000 / Cr Notes Payable 50,000. Not Accounts Payable: a note is a written promise with interest and a maturity date, and the paper classifies it separately.

At 31 December two months of interest have accrued, though none has been paid. Months ÷ 12:

$$50,000\times 5\%\times \frac{2}{12}=416.67$$

Dr Interest Expense 416.67 / Cr Interest Payable 416.67 — the Module 5 accrual, seen from the liability. The balance sheet at 31 December shows Notes Payable 50,000 (current — due within six months) and Interest Payable 416.67 as separate lines; the principal is the note, the interest is a different liability that grows with time.

On 1 May the note matures. Total interest for six months is 50,000 × 5 % × 6/12 = 1,250, and Northlake pays 51,250. But 416.67 of that interest was already expensed last year and sits in Interest Payable; only the four months since — 833.33 — is this year’s expense:

May 1   Notes Payable                    50,000.00
        Interest Payable                    416.67
        Interest Expense                    833.33
            Cash                                    51,250.00

Debiting Interest Expense for the whole 1,250 counts November and December twice — once when accrued and again now — and leaves a 416.67 payable that is never cleared. The accrual did its work at year end; the maturity entry settles it.

A days-based note

Bramble Lane Outfitters Ltd.’s 90-day, 8 % note for 15,000 (L6.2 — it replaced a supplier’s account) matures. The term is in days, so the interest is days ÷ 365:

$$15,000\times 8\%\times \frac{90}{365}=295.89$$

Dr Notes Payable 15,000 / Dr Interest Expense 295.89 / Cr Cash 15,295.89 — no accrual to clear, because the note did not cross a year end. A 360-day year (300 of interest) is a convention some US texts use; this course, and the Canadian paper, use 365. State the convention in every answer.

The loan schedule, one row later

Module 6 built the blended-payment schedule for the 100,000 groomer loan at 6 %, 23,739.64 a year:

Year  Opening      Payment     Interest   Principal    Closing
  2    82,260.36   23,739.64   4,935.62   18,804.02    63,456.34
  3    63,456.34   23,739.64   3,807.38   19,932.26    43,524.08

At the end of year 2 the loan balance is 63,456.34. The current portion is the principal that year 3’s payment will repay — the schedule’s next row, 19,932.26 — and the long-term portion is what will still be owed after it, 43,524.08, which is year 3’s closing balance. Year 3’s interest, 3,807.38, is not a liability yet: it has not been incurred. Two figures from one row, and the whole payment is never the answer.

What is not here

A private company borrows from a bank, a supplier or its owners. Bonds — debt sold in pieces to the public, with a market price and a yield — belong to public companies and to AFM 182; on a 191 paper the word appears, if at all, as a name.