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Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting 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 AccountingCopyright © by The McGraw-Hill Companies, Inc. All rights reserved. Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting 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 AccountingCopyright © by The McGraw-Hill Companies, Inc. All rights reserved. Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Key Terms promissory note note payable note receivable principal face value term issue date Promissory Notes Section 26.1 payee interest rate maturity date maker interest maturity value Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting A Promise to Pay Promissory Notes Section 26.1 How Promissory Notes Are Used Paying for Products Paying for Services Lending Borrowing promissory note A written promise to pay a certain amount of money at a specific time. Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting A Promise to Pay Promissory Notes Section 26.1 Two Types of Promissory Notes Note Payable Note Receivable note payable A promissory note issued to a creditor. note receivable A promissory note that a business accepts from a customer. Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting A Promise to Pay Promissory Notes Section 26.1 See page 755 Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting A Promise to Pay Promissory Notes Section 26.1 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). Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting A Promise to Pay Promissory Notes Section 26.1 Time Calendar See page 757 Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Calculation of Interest on a Note Promissory Notes Section 26.1 Interest on a Promissory Note Is Based on Three Factors Principal Interest Rate Term of the Note interest The fee charged for the use of money stated as a percentage of the principal. Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Calculation of Interest on a Note Promissory Notes Section 26.1 Interest = Principal x Interest Rate x Time Calculating Interest Using a Formula Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Calculation of Interest on a Note Promissory Notes Section 26.1 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. Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Calculation of Interest on a Note Promissory Notes Section 26.1 Calculating Interest Using an Interest Table See page 758 Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Key Terms long-term liabilities interest-bearing note payable non-interest-bearing note payable bank discount proceeds other expense Notes Payable Section 26.2 Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Interest-Bearing Notes Payable Notes Payable Section 26.2 What Are Long-Term Liabilities? long-term liabilities Debts that are not required to be paid within the next accounting period. Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Interest-Bearing Notes Payable Two Types of Notes Issued by Businesses Interest-Bearing Note Payable Non-Interest-Bearing Note Payable Notes Payable Section 26.2 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. Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Interest-Bearing Notes Payable Notes Payable Section 26.2 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 Recording the Issuance of an Interest-Bearing Note Payable Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Interest-Bearing Notes Payable Notes Payable Section 26.2 Business Transaction On July 2 The Starting Line issued Check 3892 for $7, payable to State Street Bank in payment of the note payable issued April 3. See page 761 Recording the Payment of an Interest-Bearing Note Payable Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Non-Interest-Bearing Notes Payable Notes Payable Section 26.2 What Is a Bank Discount? bank discount The interest charge deducted in advance on a non-interest-bearing note payable. Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Non-Interest-Bearing Notes Payable Notes Payable Section 26.2 What Are Proceeds? proceeds The cash actually received by the borrower on a non-interest-bearing note payable. Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Non-Interest-Bearing Notes Payable Notes Payable Section 26.2 A non-interest-bearing note payable has no interest rate stated on the note. See page 763 Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Non-Interest-Bearing Notes Payable Notes Payable Section 26.2 Calculating Non-Interest-Bearing Notes Payable Face Value x Discount Rate x Time = Bank Discount $1,500 x 0.12 x 90/365 = $ Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Non-Interest-Bearing Notes Payable Notes Payable Section 26.2 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 Recording the Issuance of a Non-Interest-Bearing Note Payable Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Non-Interest-Bearing Notes Payable Notes Payable Section 26.2 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. Recording the Issuance of a Non-Interest-Bearing Note Payable See page 763–764 Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Non-Interest-Bearing Notes Payable Notes Payable Section 26.2 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. Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Non-Interest-Bearing Notes Payable Notes Payable Section 26.2 See page 766 Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Key Term other revenue Notes Receivable Section 26.3 Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Recording the Receipt of a Note Receivable Notes Receivable Section 26.3 Notes Receivable Interest Income An asset account, and its normal balance is a debit. An other revenue account other revenue Nonoperating revenue that a business receives from activities other than its normal operation. Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Recording the Receipt of a Note Receivable Notes Receivable Section 26.3 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 Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Recording the Receipt of a Note Receivable Notes Receivable Section 26.3 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 Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Recording the Payment of a Note Receivable Notes Receivable Section 26.3 Business Transaction On June 7 The Starting Line received a check dated June 5 for $1, from Joe Dimaio in payment of the $1,750 note of April 6 plus interest of $35.96, Receipt 996. See page 769 Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting Question 1 Calculate the interest for the following: Use the formula: Principal X Interest Rate = Time * $2, X.12 X 3/12 $ , * ** ** Annual Interest = $31.50 X 3 years Home

Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting 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. Home

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