At the beginning of the year,your company borrows $20,000 by signing a four-year promissory note that states an annual interest rate of 8% plus principal repayments of $5,000 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?
A)Increase current liabilities by $400;increase non-current liabilities by $20,000.
B)Increase current liabilities by $1,600;increase non-current liabilities by $20,000.
C)Increase current liabilities by $5,400;increase non-current liabilities by $20,000.
D)Increase current liabilities by $5,400;increase non-current liabilities by $15,000.

Question

Quizplus · Accepted Answer

Interest Payable = Principal × Interest rate × Time
= $20,000 × 0.08 × 3 / 12 = $400
Current liabilities = Interest payable + Current portion of long-term debt
= $400 + $5,000 = $5,400
Long-term debt = Amount of promissory note − Current portion of long-term debt
= $20,000 − $5,000 = $15,000

At the Beginning of the Year,your Company Borrows $20,000 by Signing