University of the People

Bus 1102 Basic Accounting

Michael Marslek

10/12/2021

Written Assignment Unit 6

 

A common practice for government entities, particularly schools, is to issue short-term

(promissory) notes to cover daily expenditures until revenues are received from tax collection,

lottery funds, and other sources. School boards approve the note issuances, with repayments of

principal and interest typically met within a few months. The goal is to fully cover all expenses

until revenues are distributed from the state. However, revenues distributed fluctuate due to

changes in collection expectations, and schools may not be able to cover their expenditures in the

current period. This leads to a dilemma—whether or not to issue more short-term notes to cover

the deficit. Short-term debt may be preferred over long-term debt when the entity does not want

to devote resources to pay interest over an extended period. In many cases, the interest rate is

lower than long-term debt, because the loan is considered less risky with the shorter payback

period. This shorter payback period is also beneficial with amortization expenses; short-term

debt typically does not amortize, unlike long-term debt. Based on this information, compose a

paper that addresses the following:

What would you do if you found your school in this situation?

A promissory note is a signed document that contains a written promise to pay a specified sum to

a specific person or the bearer at a specific date or on demand, according to the Oxford

Dictionary. It is defined as a financial document containing a written promise made by one party

to another. If I became aware that my school was in this situation, I would begin by reducing the

school's out-of-pocket expenses. When this is done, i.e. cutting back on the school's expenses,
which in no way affects the school's quality of service, the process of indirectly running into debt

is slowed.

Would you issue more debt? Explain.

No, I will not be going to take on any more debt. Remember that the first step is to reduce

expenses, and this decision is based on the fact that the more debt incurred, the higher the

interest rate. This simply means that the money is being compounded; the more money borrowed

by the school, the more interest is added, compounding the total debt, which the school will find

difficult to settle.

Are there alternatives? Explain.

As previously stated, the alternatives to this situation are to reduce expenses that are irrelevant to

the school in the hope that this method does not affect the quality of service that the school

provides. The second option is to reduce the amount of the loan or, at the very least, to stop it

entirely and work diligently on ways to obtain funds without incurring debt. The third option is

to see if there are any investments that the school can make to help them get out of their financial

bind.

What are some positives and negatives to the promissory note practice?

It can be used for obligations ranging from inter-family loans to mortgages, according to Neil

Kokemuller's personal loan basics. Because of its simplicity, it is critical when a loan has simple

payment terms. This is why it is used for student loans, commercial loans, and so on.
The disadvantage is that a secured loan may require a higher interest rate than an unsecured loan.

You will most likely pay a higher interest rate on any loan you are interested in if you do not

have a good credit rating.

Please explain at least two positives and at least two negatives.

As mentioned by (Waterman, 1935), a Promissory Note has several advantages, which is why it

is regarded as one of the most convenient credit instruments. As an example:

- The format of promissory notes is simple, making them easier to issue.

- It is suitable for both personal and commercial use.

- It takes into account both the drawer's and the drawer’s financial needs. The former can pay on

a later date, whereas the latter can obtain an immediate price by discounting the instrument from

a bank.

- It has no effect on a company's debt-to-equity ratio.

Promissory notes have their drawbacks as well. According to Hamam (2021), some of the major

drawbacks of promissory notes are:

- It is a risky credit instrument for new borrowers because the note's seemingly short and simple

sentences may conceal some unfavorable terms. As a result, the borrower may be required to pay

a large sum to cover the liabilities incurred.

- There is a possibility that the bills will be dishonored by the drawer, and the drawer will be

obligated to settle any liabilities incurred as a result.

- It can only be used for short-term services. It cannot be used as a source of capital for large-

scale ventures.
In conclusion, many borrowers, even otherwise astute business people, are taken aback by what

they find in the fine print of a promissory note. Even if a loan plan appears to be a great deal, you

should carefully read the fine print and consult with a professional.

References:

Investopedia article. Retrieved from https://www.investopedia.com>terms

Waterman, J. (1935). The Promissory Note as a Substitute for Money. Retrieved

from https://heinonline.org/HOL/LandingPage?

handle=hein.journals/mnlr14&div=29&id=&page

Hamam, E. (2021). Pros and Cons of Using Unsecured Promissory Note. Retrieved

from https://www.legalzoom.com/articles/pros-and-cons-of-using-a-unsecured-promissory-note

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