Receivables LO 6 – Accounting for Notes Receivable

Characteristics of Notes Receivable LO 6 Characteristics of Notes Receivable A note receivable, or promissory note, is a written document containing a promise to pay. Characteristics of a promissory note are as follows: The maker is the party making the promise to pay. The payee is the party to whom the note is payable. The face amount is the amount the note is written for on its face. A note receivable is a formal promise to pay a specific amount of money on demand or at a definite time to an individual or business or the holder of the note, also known as the payee. The maker of the note is the one who makes the promise to pay. (continued)

Characteristics of Notes Receivable LO 6 Characteristics of Notes Receivable The issuance date is the date a note is issued. The due date or maturity date is the date the note is to be paid. The term of a note is the amount of time between the issuance and due dates. The interest rate is the rate of interest that must be paid on the face amount for the term of the note. The date that the note is due to be paid is called the due date or the maturity date.

LO 6 Notes Receivable Characteristics of Notes Receivable are as follows: The maker is the party making the promise to pay. The payee is the party to whom the note is payable. The face amount is the amount the note is written for on its face. The issuance date is the date a note is issued. The due date or maturity date is the date the note is to be paid. The term of the note is the amount of time between the issuance and due dates. The interest rate is that rate of interest that must be paid on the face amount for the term of the note

LO 6 Notes Receivable The maturity value is the amount that must be paid at the due date of the note, which is the sum of the face amount and the interest. What is the due date of a 90-day note dated March 16?

LO 6 Due Date of a 90-day Note What is the due date of a 90-day note dated March 16? Days in March 31 Minus issuance date of note 16 Days remaining in March 15 Add days in April 30 Add days in May 31 Add days in June (due date of June 14) 14 Term of note 90 days 90 days There are 15 days remaining in March, counting from March 17 to March 31. Adding 30 days for April, the total is 45 days. Adding 31 days for May, the total is now 76 days. To equal 90 days, add 14 more days (90 - 76); therefore, the note is due on June 14.

LO 6 Due Date of a 90-day Note

Accounting for Notes Receivable LO 6 Accounting for Notes Receivable Received a $6,000, 12%, 30-day note dated November 21, 2012, in settlement of the account of W. A. Bunn Company. W. A. Bunn Co. settles its account by signing a 12%, 30-day note, dated November 21, 2012, for $6,000.

Accounting for Notes Receivable LO 6 Accounting for Notes Receivable On December 21, when the note matures, the firm receives $6,060 from W. A. Bunn Company ($6,000 face amount plus $60 interest). On December 21, when the note matures, the firm receives $6,060 from W. A. Bunn Company ($6,000 plus $60 interest). Calculate the interest by multiplying the principal of the note, $6,000, times the interest rate, 12%, times 30 days, divided by 360 days.

Accounting for Notes Receivable LO 6 Accounting for Notes Receivable If W. A. Bunn Company fails to pay the note on the due date, it is considered a dishonored note receivable. The note and interest are transferred back to the customer’s account receivable. A note is dishonored when the maker fails to pay the note on its due date. The note plus the interest earned are transferred to the customer’s ledger account and re-established as an account receivable. Accounts Receivable is debited for $6,060 (the principal, $6,000, plus the interest of $60). Notes Receivable is credited for $6,000 (the principal of the note), and Interest Revenue is credited for $60.

Accounting for Notes Receivable LO 6 Accounting for Notes Receivable A 90-day, 12% note dated December 1, 2012, is received from Crawford Company to settle its account, which has a balance of $4,000. In another example of notes receivable accounting, Crawford signs a 90-day, 12% note, for $4,000, dated December 1, 2012. The note is received from Crawford Company to settle its account balance of $4,000.

Accounting for Notes Receivable LO 6 Accounting for Notes Receivable Assuming that the accounting period ends on December 31, an adjusting entry is required to record the accrued interest of $40 ($4,000 x 0.12 x 30/360). When a note receivable is outstanding at the end of the year, any interest that has accrued must be recorded as an adjusting entry. Calculate accrued interest on the note by multiplying the principal of $4,000 by 12% (the interest rate) by time (30 days), divided by 360 days. An entry is made debiting Interest Receivable and crediting Interest Revenue for $40, which is the interest earned for the 30 days from December 1 to December 31.

Accounting for Notes Receivable LO 6 Accounting for Notes Receivable On March 1, 2013, $4,120 is received for the note ($4,000) and interest ($120). On March 1, 2013, $4,120 is received for the note (principal of $4,000 plus interest for 3 months of $120). Cash is debited for $4,120. Notes Receivable is credited for $4,000. Interest Receivable is credited for $40, the interest that was accrued on December 31. Interest Revenue is credited for $80, the interest earned from January 1 to March 1. The $120 of interest is split between two accounting periods. 30 days of interest of $40 was earned in December, and 60 days of interest was earned in January and February.