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16-2 Notes Payable and Notes Receivable Section 1: Accounting for Notes Payable Chapter 16 Section Objectives 1.Determine whether an instrument meets all the requirements of negotiability. 2.Calculate the interest on a note. 3.Determine the maturity date of a note. 4.Record routine notes payable transactions. 5. Record discounted notes payable transactions.

16-3 UCC Requirements for Negotiability Must be in writing and signed by the maker. Must contain an unconditional promise to pay a definite amount of money. Must be payable either on demand or at a future time that is fixed or that can be determined. Must be payable to the order of a specific person or to the bearer. Must clearly name or identify the drawee if addressed to a drawee. Determine whether an instrument meets all the requirements for negotiability Objective 1

16-4 Interest = Principal x Rate x Time Amount being borrowed (also called face value) Indicated in fractions of a year Calculating Interest on a note Principal x Rate x Time = Interest \$4,000 x 0.08 x (90/360) = \$80

16-5 Determine the number of days remaining in the month of issue. Determine the number of days in each full month of the note. Determine the number of days in the last month of the note. Add the days together to confirm that they equal the period of the note. Calculating the Maturity Date of a Note Principal + Interest = Maturity Value \$4,000 + \$80 = \$4,080

16-6 Notes Payable Transactions 2013 May. 18 Store Equipment 4,000.00 Notes Payable—Trade 4,000.00 Issued note payable to Unfinished Furniture, Inc., for purchase of store equipment Record the issuance of a note payable Record routine notes payable transactions Objective 4

16-7 2013 Aug 16 Notes Payable—Trade 4,000.00 Interest Expense 80.00 Cash 4,080.00 Payment of May 18 note to Unfinished Furniture, Inc., Record payment of the note payable and interest: Interest rate is 8%, term of note is 90 days. Notes Payable Transactions

16-8 Discounted Notes Payable Face Amount – Discount = Proceeds \$10,000 – \$100 = \$9,900 Example: If a \$10,000, 6% 60-day note is discounted with the bank, then the borrower would receive only \$9,900. \$10,000 x 6% x 60/360 = \$100 interest Record discounted notes payable transactions Objective 5

16-9 Recording a Discounted Note Payable 2013 June 1 Cash 9,900.00 Interest Expense 100.00 Notes Payable—Bank 10,000.00 To record note payable issued at a discount Record issuance of discounted note: Notice that Interest Expense is debited for the \$100 interest paid in advance

16-10 Recording the payment of a Discounted Note 2013 July 31 Note Payable 10,000.00 Cash 10,000.00 To record the payment of note payable issued at a discount Record payment at maturity of a discounted note:

16-11 Reporting Notes Payable and Interest Expense Notes Payable Current liabilities if due within one year. Long-term liabilities if due in more than one year. Interest Expense Classified as a nonoperating expense. Listed in the Other Income and Expenses section of the income statement.

16-12 Notes Payable and Notes Receivable Section 2: Accounting for Notes Receivable Chapter 16 Section Objectives 6. Record routine notes receivable transactions. 7. Compute the proceeds from a discounted note receivable, and record transactions related to discounting of notes receivable. 8. Understand how to use bank drafts and trade acceptances and how to record transactions related to those instruments.

16-13 A note receivable is an asset representing a written promise by the debtor to pay the creditor a specified amount at a specified future date. ANSWER: QUESTION: What is a note receivable? Record routine notes receivable transactions Objective 6

16-14 Notes Receivable Transactions 2013 June 12 Notes Receivable 1,200.00 Accounts Receivable/John Woods 1,200.00 To record 60-day note receivable to replace an overdue account receivable. Record the receipt of an interest bearing note receivable

16-15 Notes Receivable Transactions 2013 Aug 11 Cash 1,220.00 Note Receivable 1,200.00 Interest Income 20.00 Collection of John Woods’s note plus (interest= 1,200 x 10% x 60/360 days) Record the receipt of cash from a customer in payment of their note

16-16 Note Receivable Not Collected at Maturity If a note is not paid and not renewed, it is dishonored 2013 Aug 11 Accounts Rec./John Woods 1,220.00 Notes Receivable 1,200.00 Interest Income 20.00 To charge back Woods’s dishonored note plus interest to maturity Interest income is recognized and added to the account receivable

16-17 Notes Receivable Current asset if due within one year. Long-term asset if due in more than one year. Interest Income Classified as non-operating income. Listed in the Other Income and Expenses section of the income statement. Reporting Notes Receivable and Interest Income

16-18 Draft: a written order that requires one party to pay a stated sum of money to another party Check Bank Draft A bank orders another bank to pay the stated amount to a specific party. It is more readily accepted than a business or personal check. Commercial Draft One party orders another party to pay a specified amount on a specified date. It is used for special shipment and collection situations. Drafts and Acceptances

16-19 Internal Control of Notes Payable, Notes Receivables, and Drafts:  Limit the number of people who can sign notes for the firm.  Record all notes payable immediately.  Handle drafts as carefully as checks.  Review all past due notes promptly and take necessary steps, including legal action to insure payment.