Long-Term Notes Payable Explained

C1 Explain the types and payment patterns of notes.

Like bonds, notes are issued to obtain assets such as cash. Unlike bonds, notes are typically transacted with a single lender such as a bank. An issuer initially records a note at its selling price—that is, the note’s face value minus any discount or plus any premium. Over the note’s life, the amount of interest expense allocated to each period is computed by multiplying the market rate (at issuance of the note) by the beginning-of-period note balance. The note’s carrying (book) value at any time equals its face value minus any unamortized discount or plus any unamortized premium; carrying value is also computed as the present value of all remaining payments, discounted using the market rate at issuance.