![]() ![]() ![]() Next, be aware of the “rule of 78s.” Some loan agreements stipulate that prepayments will be based on this tricky technique. It becomes apparent that one should be alert to the stated assumptions intrinsic to a loan agreement. In modern days, it may be that a lender is seeking to prey on unsuspecting borrowers. In the old days, before calculators, this could perhaps be justified to ease calculations. Some short-term borrowing agreements may stipulate that a year is assumed to have 360 days, instead of the obvious 365 days. Another acceptable alternative is to list them by maturity value, from the largest to the smallest. One scheme is to list them according to their due dates, from the earliest to the latest. In examining this illustration, one might wonder about the order in which specific current obligations are to be listed. Observe the inclusion of two separate line items for the note and related interest: Next, consider how the preceding amounts would appear in the current liability section of the balance sheet at December 31, 20X8. The cash payment included $400 for interest, half relating to the amount previously accrued in 20X8 and half relating to 20X9. On March 31, another three months of interest was charged to expense. In the preceding entries, notice that interest for three months was accrued at December 31, representing accumulated interest that must be paid at maturity on March 31, 20X9. Had the above note been created on October 1, the entries would appear as follows: When the note is repaid, the difference between the carrying amount of the note and the cash necessary to repay that note is reported as interest expense. The amount borrowed is recorded by debiting Cash and crediting Notes Payable: ![]() The interest represents 8% of $10,000 for half of a year (January 1 through June 30). In the preceding note, Oliva has agreed to pay to BancZone $10,000 plus interest of $400 on June 30, 20X8. A correct legal form would typically be far more expansive and cover numerous things like what happens in the event of default, who pays legal fees if there is a dispute, requirements of demand and notice, and so forth. The preceding illustration should not be used as a model for constructing a legal document it is merely an abbreviated form to focus on the accounting issues.
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