14–1 McQuaig Bille 1 College Accounting 10 th Edition McQuaig Bille Nobles © 2011 Cengage Learning PowerPoint presented by Douglas Cloud Professor Emeritus of Accounting, Pepperdine University Chapter 14 Notes Receivable

14–2 Note from a Charge Customer to Extend Time on Account  On March 7, Whitewater Raft Supply sold $930 worth of merchandise to Green River Rafts, with terms of 2/10, n/30, and made the original entry in its sales journal.  On April 6, Green River Rafts sent Whitewater Raft Supply a note for $930, payable within 30 days, at 6 percent interest in settlement of the transaction of March 7.

14–3 Note from a Charge Customer to Extend Time on Account

14–4 Note from a Charge Customer to Extend Time on Account T accounts for the transaction look like this:

14–5 Receipt of Payment of an Interest- Bearing Note at Maturity On May 6, Green River Rafts paid Whitewater Raft Supply in full: principal plus interest. The entry (in general journal form) follows:

14–6 Receipt of Payment of an Interest- Bearing Note at Maturity This entry in T account format follows:

14–7 Note Received as a Result of Granting a Personal Loan Grace Martin, an employee of Whitewater Raft Supply, borrows $1,000 from her employer for three months at 5 percent. The following entry records her note, dated April 8, in general journal form:

14–8 Note Received as a Result of Granting a Personal Loan When the loan reaches maturity, Martin pays the principal plus interest.

14–9 Note Received in Exchange for Merchandise or Other Property On April 9, Whitewater Raft Supply sold merchandise to Floyd Mercantile for $1,200. Floyd Mercantile gave Whitewater Raft Supply a 60 days, 5.5 percent promissory note.

14–10 Renewal of Note at Maturity and Payment of Interest  Floyd Mercantile is not able to pay the note at maturity and offers to pay the interest on the current note and to issue a new note for 30 days at 6 percent.  Two entries are required by Whitewater Raft Supply: An entry to (1) record the interest and an entry to (2) cancel the old note and record the new note.

14–11 Renewal of Note at Maturity and Payment of Interest

14–12 Renewal of Note with Payment of Interest and Partial Payment of Principal  On June 8, as a substitute for the $1,200 note, Floyd Mercantile gives Whitewater Raft Supply $500 toward the principal and a new note for $700 in addition to the interest on the old note.  Again, two entries are required. One to receive the cash and interest, and a second to record renewal of the note by issuing a new note.

14–13 Renewal of Note with Payment of Interest and Partial Payment of Principal

14–14 Dishonored Notes Receivable  When the maker of a note fails to pay the principal amount or to renew the note at maturity, the note is said to be a dishonored note receivable.  Whitewater Raft Supply holds a 60-day, 5 percent note for $950, dated April 20, from Hartman Guides, which fails to pay by the due date. Thus the note is dishonored at maturity.

14–15 Dishonored Notes Receivable

Collection of Note Formerly Dishonored Thirty days after Hartman Guides’ note was dishonored, the company pays the balance of its account, plus an additional 30 days’ interest at 5 percent on the amount owed. Whitewater Raft Supply removes the dishonored note from Notes Receivable.

14–17 Discounting Notes Receivable  When a firm raises cash by selling its notes receivable to a bank or finance company, this is called discounting notes receivable.  The bank deducts the interest or discount from the maturity value of the note to determine the proceeds.  The maturity value is the principal of the note plus interest from the date of the note until the due date.

14–18  Whitewater Raft Supply granted an extension of an open account by accepting a 60-day, 5 percent note for $1,800, dated April 20 from Bowers River Co.  Whitewater Raft Supply sold the note to New National Bank on May 5. The bank charged a discount rate of 6 percent. Discounting Notes Receivable

14–19 Discounting Notes Receivable STEP 1. Diagram the situation.

14–20 Discounting Notes Receivable STEP 2. Determine the discount period. The discount period is the time the note has left to run. April 30 – 20 =10days left in April May =5days in May Days held by = 15 days endorser

14–21 Discounting Notes Receivable STEP 3. Record the formula. Principal ($1,800) +Interest to maturity date (5%, 60 days) Value at maturity –Discount (6%, 45 days) Proceeds

14–22 Discounting Notes Receivable STEP 4. Complete the formula. Principal $1, Interest (5%, 60 days)15.00 Value at maturity$1, –Discount (6%, 45 days)13.61 Proceeds$1, $1,800 x 0.05 x 60/360 $1,815 x 0.06 x 45/360

14–23 Discounting Notes Receivable STEP 5. Record the entry.

14–24 Discounting Notes Receivable  When Whitewater Raft Supply discounted the note, it had to endorse the note. By this endorsement, Whitewater Raft agreed to pay the note when it became due if the maker did not pay.  Therefore Whitewater Raft Supply has a contingent liability for payment of the note.

14–25 Payment of Discounted Note by the Maker—Example 2  On April 25, Whitewater Raft received a 90- day, 5.5 percent, $2,500 note, dated April 24, from L. R. Ray. On May 4, Whitewater Raft Supply discounted the note at New National Bank.  Using the same five steps, let’s analyze this discounted note arrangement.

14–26 STEP 1. Diagram the situation. Payment of Discounted Note by the Maker—Example 2

14–27 Payment of Discounted Note by the Maker—Example 2 STEP 2. Determine the discount period. April 30 – 24 =6days left in April May =4days in May Days held by = 10 days endorser

14–28 Payment of Discounted Note by the Maker—Example 2 STEP 3. Record the formula. Principal ($2,500) +Interest to maturity date (5.5%, 90 days) Value at maturity –Discount (6.5%, 80 days) Proceeds

14–29 Payment of Discounted Note by the Maker—Example 2 STEP 4. Complete the formula. Principal $2, Interest (5.5%, 90 days)34.38 Value at maturity$2, –Discount (6.5%, 80 days)36.61 Proceeds$2, $2,500 x x 90/360 $2, x x 80/360

14–30 Payment of Discounted Note by the Maker—Example 2 STEP 5. Record the entry.

14–31 Payment of Discounted Note by the Maker—Example 3  On May 10, Macy and Son gave Whitewater Raft Supply a 60-day, 6 percent note for $4,500, date May 9. On June 2, Whitewater Raft Supply discounted the note at New National Bank. The bank charges a discount rate of 6.5 percent.  Using the same five steps, let’s analyze this discounted note arrangement.

14–32 STEP 1. Diagram the situation. Payment of Discounted Note by the Maker—Example 3

14–33 Payment of Discounted Note by the Maker—Example 3 STEP 2. Determine the discount period. May 31 – 9 =22days left in May June =2days in May Days held by = 24 days endorser

14–34 Payment of Discounted Note by the Maker—Example 3 STEP 3. Record the formula. Principal ($4,500) +Interest to maturity date (6%, 60 days) Value at maturity –Discount (6.5%, 36 days) Proceeds

14–35 Payment of Discounted Note by the Maker—Example 3 STEP 4. Complete the formula. Principal $4, Interest (6%, 60 days)45.00 Value at maturity$4, –Discount (6.5%, 36 days)29.54 Proceeds$4, $4,500 x 0.06 x 60/360 $4,545 x x 36/360

14–36 Payment of Discounted Note by the Maker—Example 3 STEP 5. Record the entry.

14–37 Notes Receivable Register  Companies that have a significant number of notes receivable may find it worthwhile to set up a separate list, called a notes receivable register, to keep track of them.  The total of the schedule is compared with the balance of the Notes Receivable account. The two should match.

14–38 Notes Receivable Register

14–39 End-of-Fiscal-Period Adjustments: Accrued Interest on Notes Receivable  Accrued interest income on notes receivable is the interest that is due (not yet received) on notes receivable that are outstanding at the end of the fiscal period.  A firm has two notes receivable on December 31, the end of the fiscal period: $8,000, 90 days, 6%, dated November 28 $6,500, 60 days, 5.5%, dated December 20

14–40 End-of-Fiscal-Period Adjustments: Accrued Interest on Notes Receivable Nov. 30 – 28 =2days left in November Dec. =31days in December Total= 33 days left in the fiscal period

14–41 End-of-Fiscal-Period Adjustments: Accrued Interest on Notes Receivable Interest = $8,000 x 0.06 x 33/360 = $44.00 Dec. (31 – 20) = 11 days left in the fiscal period Interest = $6,500 x x 11/360 = $10.92

14–42 End-of-Fiscal-Period Adjustments: Accrued Interest on Notes Receivable

Effect of Adjusting Entry