Question

At the beginning of the year, your company borrows $15,900 by signing a three-year promissory note that states an annual interest rate of 7% plus principal repayments of $5,300 each year. Interest is paid at the end of the second and fourth quarters, whereas principal payments are due at the end of each year. How does this new promissory note affect the current and non-current liability amounts reported on the classified balance sheet prepared at the end of the first quarter

Answer 1

Increase current liabilities by $278.25; increase non-current liabilities by $15,900.

Step-by-step explanation:

Quarterly interest expense = Amount borrowed * (Annual interest rate / 4) = $15,900 * (7% / 4) = $15,900 * 1.75% = $278.25

Since, interest is paid at the end of the second and fourth quarters and principal payments are due at the end of each year, that means both the interest expense and the principal are still liabilities at the end of the first quarters.

It should be noted that a three-year promissory note of $15,900 is a non-current liability since its tenure is more than one year, while the quarterly interest expense of $278.25 for the first quarter is a current liability since it is dues within a year.

Therefore, the effect of this new promissory note on the current and non-current liability amounts reported on the classified balance sheet prepared at the end of the first quarter will be as follows:

Increase current liabilities by $278.25; increase non-current liabilities by $15,900.