A note payable documents a borrowing obligation, including principal, payment dates and any stated interest charged on the outstanding principal. A bond payable typically divides a borrowing into securities with specified interest payments and principal repayment terms.
- Face amount: contractual principal repayable at maturity, excluding separately payable interest.
- Stated rate: contractual rate used to determine cash interest, also called the coupon rate for bonds.
- Carrying amount: recognized debt balance after adjustments for unamortized discounts, premiums and applicable debt issuance costs.
- Interest payable: interest already accrued but unpaid, ordinarily presented separately from the debt's net carrying amount.
- Debt issuance costs: qualifying direct financing costs, such as legal and underwriting costs attributable to issuing the associated debt.
For ordinary notes issued for cash at face amount, . Installment principal repayments reduce the base for subsequent interest calculations; payments containing interest must be divided between interest and principal.
A long-term note without a reasonable stated rate can contain financing expense even when its contract labels every payment principal.
Common mistakes
- Expensing the issuance discount. Marlow's $3,545.95 discount is deferred; only $822.70 enters the first coupon period's $4,822.70 expense.
- Ignoring the fee recipient. Bellmere's $500 legal cost is expensed under modification but deferred against new debt under the extinguishment alternative.
- Expensing collected accrued interest. Alder's first $3,000 coupon includes $1,500 collected at issuance, leaving only $1,500 of issuer expense.
Bottom line
- Net debt equals face plus unamortized premium minus unamortized discount and applicable issuance costs; separately accrued interest remains distinct.
- Coupon cash uses face and stated rate; effective interest uses beginning net carrying amount and the yield consistent with net proceeds.
- Discounted debt accretes toward face, premium debt declines toward face, and zero-coupon debt incurs interest without coupon payments.
- Ordinary same-creditor changes require extinguishment at a contractual present-value difference of at least 10%, subject to conversion-feature criteria and applicable scope.
Exam shortcut
The preparer places issuance, reporting, coupon and retirement dates on a payment timeline, then matches the yield's compounding period to those intervals. Separate balances for face, accrued interest, premium or discount, and issuance costs support the calculation. The final schedule balance must reconcile to maturity principal; a large residual requires investigation.
The full lesson (about 7,611 words, 51 min read) adds 13 worked examples, all 6 common mistakes, a self-check, free in the app.
Learning objectives
- II.H1
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