Notes Receivable

and Notes
Payable
Chapter 15

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Learning Objective 1
Determining interest calculations
and maturity dates on notes.

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Learning Unit 15-1

What are promissory notes?
They are a written promise to pay a certain
sum of money to a lender at a fixed future
date.
The payee is the lender.
The maker is the borrower.

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Learning Unit 15-1

$20,000.00
Oct. 2, 20xx
We, Green Company, promise to pay
NATIONAL BANK
TWENTY-THOUSAND AND 00/100DOLLARS
ON DECEMBER 1, 200x
Date of issue
Plus interest at the annual rate of 12 percent.
__________

Principal

Payee

Maker

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Learning Unit 15-1

Principal is the amount borrowed.
Maturity date is the date the money is to be
repaid.
The interest rate is the yearly interest rate.
The interest is adjusted to the length of time
for short term notes.
The obligation is called a note payable.

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Learning Unit 15-1

Interest = Principal Rate Time
What is the interest on the note due to
National Bank?
Principal:
$20,000
Interest: 12%
Time: October 2, 200x to
December 1, 200x
$20,000 12% 60 360 = $400

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Learning Unit 15-1

Determining maturity date:
The exact number of days in each month
must be used.
The date the note was issued is omitted.
Add the days remaining until the total time
on the note is reached.

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Learning Objective 2
Journalizing entries to record
renewal of a note, dishonoring
of a note, eventual receipt of
payment, and note given in
exchange for equipment purchased.
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Learning Unit 15-2

What is the entry to record a note receivable?

Notes
Notes Receivable
Receivable
Sales
Sales

xxx
xxx

Notes
Notes Receivable
Receivable
Accounts
Accounts Receivable
Receivable

xxx
xxx

xxx
xxx
xxx
xxx
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Learning Unit 15-2

What is the entry to record payments?

Cash
xxx
Cash
xxx
Notes
Notes Receivable
Receivable
Interest
Interest Income
Income

xxx
xxx
xxx
xxx

Notes
Notes Payable
Payable
Interest
Interest Expense
Expense
Cash
Cash

xxx
xxx

xxx
xxx
xxx
xxx

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Learning Unit 15-2

What is the entry to record a dishonored note?

Accounts
Accounts Receivable
Receivable
Interest
Interest Income
Income
Notes
Notes Receivable
Receivable
Notes
Notes Payable
Payable
Interest
Interest Expense
Expense
Accounts
Accounts Payable
Payable

xxx
xxx

xxx
xxx
xxx
xxx

xxx
xxx
xxx
xxx

xxx
xxx
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Learning Objective 3
Discounting an interest-bearing
note receivable and recording
a discounted note that has
been dishonored.

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Learning Unit 15-3

Sometimes notes are exchanged for cash at
the bank (discounting).
The number of days (up to maturity) that the
bank will hold the note is called the discount
period.
Maturity value becomes the new principal (of
the note) used to compute bank interest to be
charged on the note.

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Learning Unit 15-3

Bank discount is the amount of interest the
bank will charge on the note.
Cash proceeds is the amount of cash that
will be received.
Interest is deducted on the day the note is
discounted and the money borrowed.
That means the business uses less cash.

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Learning Unit 15-3

The bank will receive the exact maturity
value at due date.
No interest is computed at that time.
What are the steps?

Compute
Compute maturity
maturity value:
value:
Interest
Interest == Principal
Principal Rate
Rate Time
Time
Principal
Principal ++ Interest
Interest == Maturity
Maturity Value
Value
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Learning Unit 15-3

Calculate
Calculate discount
discount period:
period:
Number
Number of
of days
days bank
bank holds
holds the
the note
note
Bank
Bank discount
discount == Maturity
Maturity value
value
Bank
Bank discount
discount rate
rate (interest
(interest rate)
rate)
No.
No. days
days bank
bank holds
holds note
note
by
by 360.
360.
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Learning Unit 15-3

Cash Proceeds =
Maturity Value Bank Discount

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Learning Unit 15-3

Cash
Cash
Notes
Notes Receivable
Receivable
Interest
Interest Income
Income

xxx
xxx

Cash
Cash
Interest
Interest Expense
Expense
Notes
Notes Receivable
Receivable

xxx
xxx
xxx
xxx

xxx
xxx
xxx
xxx

xxx
xxx
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Learning Unit 15-3

The bank usually requires that a note be
discounted with recourse.
This means that if a note maker does not
pay the maturity value to the bank, the
company will have to pay the bank.
This is called a contingent liability.

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Learning Unit 15-3

If a note is dishonored, it is charged back to

the customer using maturity value plus
penalties as the new principal amount.

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Learning Objective 4

Handling adjustments for interest

expense and interest income.

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Learning Unit 15-4

What does it mean to discount ones own
note payable?
This means the interest is deducted from the
amount borrowed.
The cash proceeds to be used will be less
than the principal amount.

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Learning Unit 15-4

At maturity, the amount that has to be
repaid is the exact face value of the note.
The discount is a contra-account that is
written off to interest expense over the life
of the note.

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Learning Unit 15-4

Interest expense and interest income will be
computed up to the last day of the accounting period.
An adjusting entry will be made to recognize interest
expense as a debit and accounts payable as a credit.
An adjusting entry will be made to recognize interest
earned as a credit and interest receivable as a debit.

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End of Chapter 15

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