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Occasionally, the maker of a note either cannot or will not pay the note at
maturity. Whena note's maker refuses to pay at maturity, the note is said to be
dishonoured.
A note receivable which cannot be collected at maturity is said to have been
defaulted bythe maker.
Immediately after the default of a note, an entry should be made by the holder to
transfer the amount due from the Notes Receivable account to an account
receivable from the debtor.
To illustrate, Symplex Company holds an 20,000, 6%, 90-days note of George
Jones. At maturity, Jones dishonours the note. To remove the dishonoured note
from its Notes Receivable account, the company makes the following entry:
** Entry about the collection of dishonourned N/R along with the additional
earning of interest:
10 / 4 Cash .......................................................................... 20,360
Account Receivable................................................................. 20,300
Add: Interest Earned .............................................................. 60
** The partial collection of dishonoured N/R & reniewal of the remaining amount:
20/3 Cash .......................................................................... 10,300
new note 30 days 8% n/r (A) ...................................................10,000
old note 90 days 6% n/r (A)........................................................................ 20,000
Interest Earned ............................................................................ 300