When a company issues a note at face value, the company debits the cash account and credits the note payable account for the face value of the note (the lender, on the other hand, would debit note receivable and credit cash).
When the borrower incurs interest, the borrower would debt interest expense and credit the cash account (if the interest is paid immediately; otherwise, the borrower would credit interest payable). The lender, on the other hand, would record interest revenue at each interest date.
If interest is due quarterly, the interest payment would be calculated as follows:
(annual interest rate x face value of the note) / 4
If interest is due monthly, the interest payment would be calculated as follows:
(annual interest rate x face value of the note) / 12
When the borrower repays the note, the borrower should debit the note payable account (to remove the liability from its balance sheet) as well as account for the final interest payment.
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