1 © copyright doug hillman 1999 short-term financing

1© Copyright Doug Hillman 1999

Short-Term Financing


Financing Considerations

Interest cost Continuing availability of financing

method Effects on availability and cost of

alternative sources of money


Promissory Note

Unconditional written promise to pay


Promissory Note

Unconditional written promise to pay a definite sum of money


Promissory Note

Unconditional written promise to pay a definite sum of money on demand or at a future date.


Promissory Note

Unconditional written promise to pay a definite sum of money on demand or at a future date.

Person promising to payee is maker Person promised the payment is payee


Characteristics of Promissory Note

In writing and signed by maker Unconditional promise to pay a certain

sum of money Payable to a bearer or stated person Payable on demand or a specified future

time May or may not be interest bearing


Maturity Date

Date when payment is due Calculation

› Days in month note is dated minus date of note

› Add number of days in succeeding months until total is reached


Computing Interest

Interest = Principal x Rate x Time Maturity stated in days $30 = $1,000 x 0.12 x 90/360 Maturity stated in months $50 = $1,000 x 0.12 x 5/12 Maturity stated in years $240 = $1,000 x 0.12 x 2


Maturity Value of Note

Principal amount plus interest to maturity

$1,000, 12%, 90 day note $1,000 + $30 = $1,030


Annual Effective Interest Rate

Average annual interest cost divided by Average outstanding principal Borrow $1,000 with 24 payments of $50 24 x $50 = $1,200 $1,200 - $1,000 = $200 $100 / $500 = 20%


Issuance of Note Bearing Interest on Face Value

At issuance› Increase Cash for amount received (face value)› Increase Notes Payable for face value

At maturity› Decrease Notes Payable for face value› Increase Interest Expense for interest to

maturity› Decrease Cash for total


Issuance of Note Discounted on Face Value

At issuance› Increase Cash for face value less discount› Increase Discount on Notes Payable for

discount› Increase Notes Payable for face value


Issuance of Note Discounted on Face Value

At maturity› Increase Interest Expense for discount› Decrease Discount on Notes Payable for

discount› Decrease Notes Payable for face value› Decrease Cash for face value


Effective Interest Calculation

EffectiveInterest

Rate

Discount

Net Proceeds

360

Termof Note

= X


End of Period Adjustments

Notes written in one accounting period and maturing in a later period require adjustment to accrue interest

Calculate interest from date of note to period ending date


Notes Receivable

Receipt of note for sale› Record normal sale entry› Transfer amount from Accounts Receivable

to Notes Receivable Receipt of note in settlement of open

account› Transfer amount from Accounts Receivable

to Notes Receivable


Discounting Customers Note

Determine maturity value Find discount period bank will hold note Compute discount by multiplying

maturity value by discount rate Deduct discount from maturity value to

determine proceeds


Discounting Customers Note

Payee is contingently liable for note if maker does not pay at maturity

Notes Receivable Discounted used to indicate contingent liability

Presentation

Notes Receivable $1,000

Deduct: N/R discounted 400

Net Notes Receivable $600


Analyzing Information Determine the availability and adequacy of

credit sources What percent of credit line used up at balance

sheet date? When does the line expire? Is it likely to be renewed? Are any credit line requirements not being met? Is credit line sufficient?

1 © copyright doug hillman 1999 short-term financing

Documents

copyright doug hillman

face value slide

date slide

maturity value of note

date of note

x slide

issuance of note

total slide