![]() ![]() It is common knowledge that money borrowed from a bank will accrue interest that the borrower will pay to the bank, along with the principal. But what is present value? It is a discounted cash flow concept, which we will discuss next. Long-term notes payable are to be measured initially at their fair value, which is calculated as the present value amount. Long-Term Notes Payable, Interest, and the Time Value of Money A review of the time value of money, or present value, is presented in the following to assist you with this learning concept. As a result, any notes payable with greater than one year to maturity are to be classified as long-term notes and require the use of present values to estimate their fair value at the time of issuance. Maintenance of certain ratio thresholds, such as the current ratio or debt to equity ratios, are all common measures identified in restrictive covenants.Īs the length of time to maturity of the note increases, the interest component becomes increasingly more significant. Additionally, restrictions on minimum working capital (current assets minus current liabilities), management remuneration, capital expenditures, or dividends paid to shareholders are often found in covenant conditions. Restrictive covenants are any quantifiable measures that are given minimum threshold values that the borrower must maintain. These include the interest rate, property pledged as security, payment terms, due dates, and any restrictive covenants. Also, the process to issue a long-term note is more formal, and involves approval by the board of directors and the creation of legal documents that outline the rights and obligations of both parties. For example, notes with due dates greater than one year.Īs previously discussed, the difference between a short-term note and a long-term note is the length of time to maturity.
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