Final answer:
At December 31, 2018, a business with a $18,000 five-year, 5% note payable should record interest payable of $900. The practice of issuing bonds or notes payable is a standard method for firms to raise capital, and investors.
Step-by-step explanation:
On January 1, 2018, a business borrowed $18,000 on a five-year, 5% note payable. At December 31, 2018, the business should record interest payable of $900. Interest for the year is calculated by multiplying the principal amount of $18,000 by the annual interest rate of 5%.
Borrowing through various instruments like notes payable or issuing bonds is a common practice for businesses seeking to finance their operations or expand.
For example, a firm seeking to borrow a larger amount, say $50 million, might issue bonds that are split into smaller denominations, making it easier for individual investors to loan the firm smaller amounts, like $5,000 per bond.
Bondholders are the investors who provide these funds, and they are entitled to receive interest payments according to the terms of the bond.
Failing to make these payments can lead to legal action, but there's always a risk involved; if the company defaults, bondholders may not recoup all their invested capital.