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Businesses issue two types of notes: interest-bearing notes and noninterest-bearing notes. Businesses record the receipt of a note receivable as well as the payment of the note.

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Explain how businesses use promissory notes. Calculate and record notes payable and notes receivable. Explain the difference between interest-bearing and non-interestbearing notes. Journalize transactions involving notes payable. Journalize transactions involving notes receivable.

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Section 26.1

Promissory Notes

Key Terms
promissory note note payable note receivable principal face value term issue date payee interest rate maturity date maker interest maturity value

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A Promise to Pay
Section 26.1 Promissory Notes

Paying for Products

How Promissory Notes Are Used

Paying for Services

Lending

Borrowing

promissory note A written promise to pay a certain amount of money at a specific time.
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A Promise to Pay
Section 26.1 Promissory Notes

Note Payable

Two Types of Promissory Notes

Note Receivable

note payable A promissory note issued to a creditor. note receivable A promissory note that a business accepts from a customer.
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A Promise to Pay
Section 26.1 Promissory Notes

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See page 755

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A Promise to Pay
Section 26.1 Promissory Notes

Calculating a maturity date using a time calendar

Locate the issue date in the Day of month column. Move across to the issue month to find the day of the year (September 14 is 257).

Add the number of days in the term to the day of the year (90+257=347).

Find this number in the month columns (347 corresponds to December 13).

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A Promise to Pay
Section 26.1 Promissory Notes

Time Calendar

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See page 757

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Calculation of Interest on a Note

Section 26.1 Promissory Notes

Interest on a Promissory Note Is Based on Three Factors

Principal interest The fee charged for the use of money stated as a percentage of the principal.

Interest Rate

Term of the Note

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Calculation of Interest on a Note

Section 26.1 Promissory Notes

Calculating Interest Using a Formula

Interest = Principal x Interest Rate x Time

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Calculation of Interest on a Note

Section 26.1 Promissory Notes

Calculating Interest Using an Interest Table

Find the term of the note in the Day column.

Follow the row until you reach the column for the interest rate. Where they intersect is the factor (per $100 of principal). Divide the principal of the note by 100.

Multiply the result by the factor to find the amount of interest.

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Calculation of Interest on a Note

Section 26.1 Promissory Notes

Calculating Interest Using an Interest Table

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Section 26.2

Notes Payable

Key Terms
long-term liabilities interest-bearing note payable non-interest-bearing note payable bank discount proceeds other expense

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Interest-Bearing Notes Payable

Section 26.2 Notes Payable

What Are

Long-Term Liabilities?

long-term liabilities Debts that are not required to be paid within the next accounting period.

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Interest-Bearing Notes Payable

Section 26.2 Notes Payable

Interest-Bearing Note Payable

Two Types of Notes Issued by Businesses

Non-Interest-Bearing Note Payable

interest-bearing note payable A note that requires the face value plus interest to be paid on the maturity date. non-interest-bearing note payable A note from which the interest is deducted in advance from the face value of the note; no interest rate is stated on the note.
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Interest-Bearing Notes Payable

Section 26.2 Notes Payable

Recording the Issuance of an Interest-Bearing Note Payable

Business Transaction

On April 3 The Starting Line borrowed $7,000 from State Street Bank and issued a 90-day, 12% note payable to the bank, Note 6.

See pages 760761

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Interest-Bearing Notes Payable

Section 26.2 Notes Payable

Recording the Payment of an Interest-Bearing Note Payable

Business Transaction

On July 2 The Starting Line issued Check 3892 for $7,207.12 payable to State Street Bank in payment of the note payable issued April 3.

See page 761

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Non-Interest-Bearing Notes Payable

Section 26.2 Notes Payable

What Is a

Bank Discount?

bank discount The interest charge deducted in advance on a non-interest-bearing note payable.

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Non-Interest-Bearing Notes Payable

Section 26.2 Notes Payable

What Are

Proceeds?

proceeds The cash actually received by the borrower on a non-interest-bearing note payable.

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Non-Interest-Bearing Notes Payable

Section 26.2 Notes Payable

See page 763

A non-interest-bearing note payable has no interest rate stated on the note.

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Non-Interest-Bearing Notes Payable

Section 26.2 Notes Payable

Calculating Non-Interest-Bearing Notes Payable

Face Value x Discount Rate x Time = Bank Discount $1,500 x 0.12 x 90/365 = $ 44.38
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Non-Interest-Bearing Notes Payable

Section 26.2 Notes Payable

Recording the Issuance of a Non-Interest-Bearing Note Payable

Business Transaction

On June 12 The Starting Line signed a $1,500, 90-day non-interest-bearing note payable that First Federal Bank discounted at a rate of 12%, Note 13.

See page 763764

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Non-Interest-Bearing Notes Payable

Section 26.2 Notes Payable

Recording the Issuance of a Non-Interest-Bearing Note Payable

Business Transaction

On June 12 The Starting Line signed a $1,500, 90-day non-interest-bearing note payable that First Federal Bank discounted at a rate of 12%, Note 13.

See page 763764

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Non-Interest-Bearing Notes Payable

Section 26.2 Notes Payable

The Interest Expense account is classified as an other expense.

other expense A nonoperating expense; an expense that does not result from the normal operations of the business.
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Non-Interest-Bearing Notes Payable

Section 26.2 Notes Payable

See page 766

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Section 26.3

Notes Receivable

Key Term
other revenue

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Recording the Receipt of a Note Receivable

Section 26.3 Notes Receivable

Notes Receivable

An asset account, and its normal balance is a debit.

Interest Income

An other revenue account

other revenue Nonoperating revenue that a business receives from activities other than its normal operation.
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Recording the Receipt of a Note Receivable

Section 26.3 Notes Receivable

Business Transaction
On March 1 The Starting Line sold $1,750 of merchandise on account to Joe Dimaio. That transaction was recorded in The Starting Lines sales journal. Joe cannot pay his account by the due date. On April 8 The Starting Line received a 60-day, 12.5% note dated April 6 for $1,750 from Joe Dimaio to settle the account receivable, Note 4.

See page 768769

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Recording the Receipt of a Note Receivable

Section 26.3 Notes Receivable

Business Transaction
On March 1 The Starting Line sold $1,750 of merchandise on account to Joe Dimaio. That transaction was recorded in The Starting Lines sales journal. Joe cannot pay his account by the due date. On April 8 The Starting Line received a 60-day, 12.5% note dated April 6 for $1,750 from Joe Dimaio to settle the account receivable, Note 4.

See page 768769

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Recording the Payment of a Note Receivable

Section 26.3 Notes Receivable

Business Transaction

On June 7 The Starting Line received a check dated June 5 for $1,785.96 from Joe Dimaio in payment of the $1,750 note of April 6 plus interest of $35.96, Receipt 996.

See page 769

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Question 1

Calculate the interest for the following:

Use the formula: Principal X Interest Rate = Time
$ 75.00 * 163.56 94.50 ** 2,310.00 49.73

* $2,500.00 X .12 X 3/12 ** Annual Interest = $31.50 X 3 years

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Question 2

Why is interest received from customers considered other revenue? This is revenue from activities other than the normal operations of the business. If a company is not in the business of lending money, the revenue from this transaction is considered nonoperating revenue.

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End of

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