Question

Notes Payable

A business issued a 90-day, 7% note for $30,000 to a creditor on account. Illustrate the effects on the accounts and financial statements of recording (a) the issuance of the note and (b) the payment of the note at maturity, including interest.

If no account or activity is affected, select "No effect" from the dropdown list and leave the corresponding number entry box blank. Enter account decreases and cash outflows as negative amounts.

a. Illustrate the effects on the accounts and financial statements of recording the issuance of the note.

Statement of Cash Flows	Balance Sheet								Income Statement
	Assets	=	Liabilities			+	Stockholders' Equity
	No effect	=	Accounts payable	+	Notes payable	+		No effect
Statement of Cash Flows								Income Statement
No effect								No effect

b. Illustrate the effects on the accounts and financial statements of recording the payment of the note at maturity, including interest. Assume a 360-day year.

Statement of Cash Flows	Balance Sheet						Income Statement
	Assets	=	Liabilities	+	Stockholders' Equity
	Cash	=	Notes payable	+		Retained earnings
Statement of Cash Flows						Income Statement
Operating						Interest expense

Answer 1

Req a:
Balance Sheet
Assets =	Accounts payable +		Notes payable +		Stockholder's equity
No effect	Decrease $30,000		Increase $30000		No effect
Statement of cash flows:
No effect
Income Statement:
No effect
Req b:
Balance Sheet
Assets =	Accounts payable +		Notes payable +		Stockholder's equity
Cash Decrease			Notes payable Decrease		Retained earnings
$30,525			$300,000		Decrease by $525
Statement of cash flows:
Cashflows from Operating activities:
Payment of short term note payable			-30000
Payment of interest			-525
Net cash used in operating activities			-30525
Income statement:
Interest expense			525