DO NOW: When Wells Fargo lends money to a company, what factors do you think it considers? Glencoe Accounting Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Businesses issue two types of notes: interest-bearing notes and non- interest-bearing notes. Businesses record the receipt of a note receivable as well as the payment of the note. Glencoe Accounting Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Explain how businesses use promissory notes. Calculate and record notes payable and notes receivable. Explain the difference between interest-bearing and non-interest- bearing notes. Journalize transactions involving notes payable. Journalize transactions involving notes receivable. Glencoe Accounting Glencoe Accounting Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Key Terms promissory note note payable note receivable principal 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 Glencoe Accounting

How Promissory Notes Are Used 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. Glencoe Accounting

Two Types of Promissory Notes 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. Glencoe Accounting

A Promise to Pay See page 755 Section 26.1 Promissory Notes Glencoe Accounting

Calculating a maturity date using a time calendar 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). Glencoe Accounting

A Promise to Pay Time Calendar See page 757 Section 26.1 Promissory Notes Time Calendar See page 757 Glencoe Accounting

Calculation of Interest on a Note Section 26.1 Promissory Notes Interest on a Promissory Note Is Based on Three Factors interest The fee charged for the use of money stated as a percentage of the principal. Principal Interest Rate Term of the Note Glencoe Accounting

Calculation of Interest on a Note Section 26.1 Promissory Notes Calculating Interest Using a Formula Interest = Principal x Interest Rate x Time Glencoe Accounting

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. Glencoe Accounting

Calculation of Interest on a Note Section 26.1 Promissory Notes Calculating Interest Using an Interest Table See page 758 Glencoe Accounting

Key Terms long-term liabilities interest-bearing note payable Section 26.2 Notes Payable Key Terms long-term liabilities interest-bearing note payable non-interest-bearing note payable bank discount proceeds other expense Glencoe Accounting

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. Glencoe Accounting

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. Glencoe Accounting

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 760–761 Glencoe Accounting

Interest-Bearing Notes Payable Section 26.2 Recording the Payment of an Interest-Bearing Note Payable Notes 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 Glencoe Accounting

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. Glencoe Accounting

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. Glencoe Accounting

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. Glencoe Accounting

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 Glencoe Accounting

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 763–764 Glencoe Accounting

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 763–764 Glencoe Accounting

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. Glencoe Accounting

Non-Interest-Bearing Notes Payable Section 26.2 Notes Payable See page 766 Glencoe Accounting

Key Term other revenue Section 26.3 Notes Receivable Glencoe Accounting

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. Glencoe Accounting

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 Line’s 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 768–769 Glencoe Accounting

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 Line’s 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 768–769 Glencoe Accounting

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 Glencoe Accounting

Calculate the interest for the following: Question 1 Calculate the interest for the following: Use the formula: Principal X Interest Rate = Time * $2,500.00 X .12 X 3/12 $ 75.00 * 163.56 94.50 ** Annual Interest = $31.50 X 3 years ** 2,310.00 49.73 Glencoe Accounting

Why is interest received from customers considered “other revenue”? 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. Glencoe Accounting

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