1. ACCOUNTING FOR NOTES AND INTEREST
CHAPTER EIGHTEEN
ACCOUNTING FOR NOTES AND INTEREST

2. PROMISSORY NOTE
Def. - a written promise to pay a specific sum at a definite future date.
Also called a “note.”
Often used when credit is extended for 60 days or more, or when large amounts of money are involved.

3. PROMISSORY NOTE
PRINCIPAL $
1,500.00

4. PROMISSORY NOTE
Date of the
note $
1,500.00
June 9, 20
- -

5. PROMISSORY NOTE Term of the note $ 1,500.00 June 9, 20 - - Ninety Days
AFTER DATE I
PROMISE TO PAY TO

6. TIME is calculated in months.
TERM OF THE NOTE
Def. - months or days
from date of issue to date of maturity
Used to calculate TIME
the term of the note stated as a fraction of a year
Note: It is common to use 360 days as a year.
When the term of note is
expressed as months,
TIME is calculated in months.

7. TERM OF THE NOTE Def. - months or days Used to calculate TIME
from date of issue to date of maturity
Used to calculate TIME
the term of the note stated as a fraction of a year
Note: It is common to use 360 days as a year.
When the term of the note is expressed
as days, the TIME is calculated using
the exact number of days.

8. month the note was issued.
COMPUTING DUE DATE
Example: Note is dated June 9, 20-- and is due in 90 days.
Days in June 30
STEP #1 Start with the
month the note was issued.

9. COMPUTING DUE DATE
Example: Note is dated June 9, 20-- and is due in 90 days.
Days in June 30
Deduct date of note (June 9) 9
Days remaining in June 21
Subtract the date the note was issued
(we do not count the date of issuance).

10. COMPUTING DUE DATE
Example: Note is dated June 9, 20-- and is due in 90 days.
Days in June 30
Deduct date of note (June 9) 9
Days remaining in June 21
Add: Days in July 31
Days in August 31
STEP #2 Add to the result of step #1 the no. of
days in as many months as possible without
exceeding the time of the note.

11. 83 days of the note have past.
COMPUTING DUE DATE
Example: Note is dated June 9, 20-- and is due in 90 days.
Days in June 30
Deduct date of note (June 9) 9
Days remaining in June 21
Add: Days in July 31
Days in August 31
By the end of August,
83 days of the note have past.

12. COMPUTING DUE DATE
Example: Note is dated June 9, 20-- and is due in 90 days.
Days in June 30
Deduct date of note (June 9) 9
Days remaining in June 21
Add: Days in July 31
Days in August 31
STEP #3 Subtract the result of step #2
from the time of the note. ( )

13. The result is the date of the month the note is due.
COMPUTING DUE DATE
Example: Note is dated June 9, 20-- and is due in 90 days.
Days in June 30
Deduct date of note (June 9) 9
Days remaining in June 21
Add: Days in July 31
Days in August 31
The result is the date of the month the note is due.

14. called the Maturity Date.
COMPUTING DUE DATE
Example: Note is dated June 9, 20-- and is due in 90 days.
Days in June 30
Deduct date of note (June 9) 9
Days remaining in June 21
Add: Days in July 31
Days in August 31
Maturity date, September 7 7
The 90th day (Sept. 7th) is
called the Maturity Date.

15. COMPUTING DUE DATE
Example: Note is dated June 9, 20-- and is due in 90 days.
Days in June 30
Deduct date of note (June 9) 9
Days remaining in June 21
Add: Days in July 31
Days in August 31
Maturity date, September 7 7
Total time in days 90

16. PROMISSORY NOTE PAYEE $ 1,500.00 June 9, 20 - - Ninety Days AFTER DATE
PROMISE TO PAY TO
THE ORDER OF
Sarah Morney

17. PROMISSORY NOTE INTEREST RATE $ 1,500.00 June 9, 20 - - Ninety Days
AFTER DATE I
PROMISE TO PAY TO
THE ORDER OF
Sarah Morney
One Thousand Five Hundred and 00/100
PAYABLE AT
Brentwood Bank
WITH INTEREST AT
9% per Annum from Date
INTEREST
RATE
Notes may be
Interest bearing or
non Interest bearing.

18. CALCULATING INTEREST $1,500.00 9% 90/360 $33.75 Interest FORMULA:
PRINCIPAL x
RATE x
TIME
$1,500.00 x 9% x
90/360
$33.75
Interest

19. CALCULATING INTEREST $2,000.00 8% 3/12 $40 Interest FORMULA: PRINCIPAL
Example: A $2,000, 8% note due in 3 months
FORMULA:
PRINCIPAL x
RATE x
TIME
$2,000.00 x 8% x
3/12
$40
Interest

20. PROMISSORY NOTE MATURITY DATE $ 1,500.00 June 9, 20 - - Ninety Days
AFTER DATE I
PROMISE TO PAY TO
THE ORDER OF
Sarah Morney
One Thousand Five Hundred and 00/100
PAYABLE AT
Brentwood Bank
MATURITY
DATE
WITH INTEREST AT
9% per Annum from Date
No. 6
Due
Sept. 7, 20--

21. PROMISSORY NOTE $ 1,500.00 June 9, 20 - - Ninety Days AFTER DATE I
PROMISE TO PAY TO
THE ORDER OF
Sarah Morney
One Thousand Five Hundred and 00/100
PAYABLE AT
Brentwood Bank
WITH INTEREST AT
9% per Annum from Date
Maker
of Note
No. 6
Due
Sept. 7, 20--
Paul DeBruke

22. NOTES RECEIVABLE TRANSACTIONS
Six types
Note received from a customer to extend time for payment of an account
Note collected at maturity
Note renewed at maturity
Note discounted before maturity
Note dishonored
Collection of dishonored note

23. NOTE RECEIVED TO EXTEND TIME FOR PAYMENT
Example: Accounts Receivable customer, Michael Putter owes $2,000. To settle this account, Putter signs a 90-day, 10% note dated June 8.
Why would we want to
accept this note?

24. NOTE RECEIVED TO EXTEND TIME FOR PAYMENT
Example: Accounts Receivable customer, Michael Putter owes $2,000. To settle this account, Putter signs a 90-day, 10% note dated June 8.
Two reasons to accept this note:
Note is a formal, written promise to pay.
Can be converted to cash at a bank if necessary
Note is likely to bear interest.

25. GENERAL JOURNAL Mr. Putter’s balance is removed
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
June 8
Notes Receivable
2,000 2
Accounts Receivable
2,000 3
Received note to settle 4
account 5
Mr. Putter’s balance is removed
from Accounts Receivable and
placed into Notes Receivable. 6 7 8 9 10 11

26. NOTE RECEIVED TO EXTEND TIME FOR PAYMENT
Example: What if Accounts Receivable customer Michael Putter gives a check for $250 and a note for $1,750 instead?
Let’s look at
the Journal
Entry!

27. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 June 8 Cash 250 2
Notes Receivable
1,750 3
Accounts Receivable
2,000 4
Received cash and note 5
to settle account 6 7 8 9 10 11

28. NOTE COLLECTED AT MATURITY
When a note receivable matures, it may be collected:
By the payee
By the bank named in the note, or
By a bank where it was left for collection.

29. NOTE COLLECTED AT MATURITY
Example: On September 6 (the due date), Putter pays the principal and interest on the note.
Principal of note
$2,000
Interest 50
$2,000 x 10% x 90/360

30. NOTE COLLECTED AT MATURITY
Example: On September 6 (the due date), Putter pays the principal and interest on the note.
Principal of note
$2,000
Interest 50
Maturity Value
$2,050

31. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Sept 6 Cash 2,050 2
Notes Receivable
2,000 3
Interest Revenue 50 4
Received payment of note 5
with interest 6 7 8 9 10 11

32. NOTE COLLECTED AT MATURITY
Example: What if the note had been left at Planet Bank for collection instead?
Planet Bank would collect the maturity value from Putter, subtract out a service charge and deposit the remainder in our account.

33. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Sept 6 Cash 2,040 2
Collection Expense 10 3
Notes Receivable
2,000 4
Interest Revenue 50 5
Received payment of note 6
with interest less collection 7
fee 8 9 10 11

34. NOTE RENEWED AT MATURITY
Example: At maturity Putter is unable to pay the maturity value. Instead, he pays only the $50 interest and signs a new 60-day, 10% note.
Let’s look at
the Journal
Entry!

35. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Sept 6 Cash 50 2
Notes Receivable (new note)
2,000 3
Notes Receivable (old note)
2,000 4
Interest Revenue 50 5
Received new note plus 6
interest on old note 7 8 9 10 11

36. NOTE RENEWED AT MATURITY
Example: What if Putter pays the $50 interest and $500 toward the principal?
Let’s look at
the Journal
Entry!

37. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Sept 6 Cash 550 2
Notes Receivable (new note)
1,500 3
Notes Receivable (old note)
2,000 4
Interest Revenue 50 5
Received new note plus 6
partial payment and interest 7
on old note 8 9 10 11

38. NOTE DISCOUNTED BEFORE MATURITY
If a business needs cash before the due date of a note, it can endorse the note and transfer it to a bank.
Bank charges an interest fee “Bank Discount”
for the time between the date of discounting and the due date of the note.
The difference between the maturity value and the bank discount is called the “Proceeds.”

39. NOTE RENEWED AT MATURITY
Example: Assume the $2,000, 10%, 90-day note from Putter dated June 8 is discounted at the bank on July 8 at a rate of 12%.
Calculating
the discount and
proceeds is a four
step process.

40. NOTE RENEWED AT MATURITY
Example: Assume the $2,000, 10%, 90-day note from Putter dated June 8 is discounted at the bank on July 8 at a rate of 12%.
Step #1 Compute the maturity value of the note.
Face +
Interest =
Maturity Value
$2,000
$50
$2,050 + =

41. NOTE RENEWED AT MATURITY
Example: Assume the $2,000, 10%, 90-day note from Putter dated June 8 is discounted at the bank on July 8 at a rate of 12%.
Step #2 Compute the number of days in the discount period - from the discount date to the due date.
Days in July 31
Less: Discount date 8
The discount date is not
counted in the Discount Period.

42. NOTE RENEWED AT MATURITY
Example: Assume the $2,000, 10%, 90-day note from Putter dated June 8 is discounted at the bank on July 8 at a rate of 12%.
Step #2 Compute the number of days in the discount period - from the discount date to the due date.
Days in July 31
Less: Discount date 8
Remaining days in July 23
Plus days in August 31
Plus due date (Sept) 6
Days in Discount Period 60

43. NOTE RENEWED AT MATURITY
Example: Assume the $2,000, 10%, 90-day note from Putter dated June 8 is discounted at the bank on July 8 at a rate of 12%.
Step #3 Compute the discount amount.
Maturity Value
Discount Rate
Discount Period
Discount Amount = X X
$41
$2,050
12%
60/360 = X X

44. NOTE RENEWED AT MATURITY
Example: Assume the $2,000, 10%, 90-day note from Putter dated June 8 is discounted at the bank on July 8 at a rate of 12%.
Step #4 Compute the proceeds.
Maturity Value
Discount Amount
Proceeds - =
$2,009
$2,050 -
$41 =
Let’s journalize the
discounting of this note.

45. What if the proceeds are less than the face value of the note?
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
July 8
Cash
2,009 2
Notes Receivable
2,000 3
Interest Revenue 9 4
Discounted note receivable 5
What if the proceeds are less than
the face value of the note? 6 7 8 9 10 11

46. The difference represents
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
July 8
Cash
1,992 2
Interest Expense 8 3
Notes Receivable
2,000 4
Discounted note receivable 5
The difference represents
interest expense. 6 7 8 9 10 11

47. NOTE DISHONORED Maker of the note does not pay or renew it at maturity
Maker is still liable
But note loses its legal status
Payee transfers the amount due from Notes Receivable to Accounts Receivable

48. Interest, although it has not is recognized as earned
NOTE DISHONORED
Example: Putter dishonors the $2,000, 10% 90-day note.
Interest, although it has not
been paid by the maker,
is recognized as earned
by the payee.

49. The entire maturity value is debited to Accounts Receivable.
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
Sept 6
Accounts Receivable/Putter
2,050 2
Notes Receivable
2,000 3
Interest Revenue 50 4
Note receivable dishonored 5
The entire maturity value
is debited to Accounts Receivable. 6 7 8 9 10 11

50. The payee then attempts to recover the maturity value
NOTE DISHONORED
Example: If Putter’s note had been discounted at the bank and then was dishonored by the maker, the bank will require the PAYEE to pay the principal, interest and bank fees.
The payee then attempts to
recover the maturity value
PLUS the bank fee
from the maker.

51. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Sept 6
Accounts Receivable/Putter
2,060 2
Cash
2,060 3
Paid bank for dishonored 4
note 5 6 7 8 9 10 11

52. COLLECTION OF A DISHONORED NOTE
Example: On October 16, the payee collects from Putter after the note had been discounted and dishonored.
The maker pays the maturity value,
bank fee and additional interest
for the period since dishonoring
the note.

53. GENERAL JOURNAL + + = = + $2,082.89 = + + DATE DESCRIPTION DEBIT PR
CREDIT 1
Oct 16
Cash
2,082.89 2 3 4
Principal +
Interest +
Bank Fee + + =
$2,000
$50
$10
$2,060 5 6
$2,060 x
10% x
40/360 =
$22.89 7 +
$2,082.89
$2,060
$22.89 = 8 9 10 11

54. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Oct 16 Cash
2,082.89 2
Accounts Receivable
2,060.00 3
Interest Revenue
22.89 4
Collected dishonored note 5
with interest 6 7 8 9 10 11

55. When a business has many notes, it may keep a Notes Receivable
NOTES RECEIVABLE REGISTER
Date Received
Interest
Maker
Time
Due Date
Amount
Rate
Amount
20--
Apr. 4
L. Peters
60-day
June 3
400.00 8%
5.33 21
J. Slaw
60-day
June 21
600.00 9%
9.00
May 2
S. Alpart
30-day
June 1
700.00 9%
5.25 19
L. Shein
90-day
Aug. 17
800.00 9%
18.00
June 20
J. Slaw
60-day
Aug. 19
500.00 9%
7.50
When a business has many notes,
it may keep a Notes Receivable
Register.

56. NOTES RECEIVABLE REGISTER
Interest
Discounted
Date Collected
Remarks
Rate
Amount
Bank
Date 8%
5.33
June 3 9%
9.00
June 20
Renewal for $500 9%
5.25
June 1
Sent for collection 5/30 9%
18.00 9%
7.50
Renewal of 4/21 note

57. ACCRUED INTEREST RECEIVABLE
Revenue should be recognized when it is earned.
Not always practical
Interest is earned day by day
Common for interest to be recognized when note is due
If note is received and due within a single accounting period
If note is received in one period and due in the next, accrued interest must be recorded at the end of the period.

58. ACCRUED INTEREST RECEIVABLE
Example: The fiscal year ends on June 30. Two notes from the Notes Receivable Register remain outstanding. Accrued interest on these notes must be calculated and recognized.
Days from Issue Date to June 30
Accrued Interest June 30
Date of Issue
Rate of Interest
Principal
$800.00
May 19 9% 42
$8.40
$ x 9% x 42/360

59. ACCRUED INTEREST RECEIVABLE
Example: The fiscal year ends on June 30. Two notes from the Notes Receivable Register remain outstanding. Accrued interest on these notes must be calculated and recognized.
Days from Issue Date to June 30
Accrued Interest June 30
Date of Issue
Rate of Interest
Principal
$800.00
May 19 9% 42
$8.40
$500.00
June 20 9% 10
1.25
$9.65

60. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 June 30
Accrued Interest Receivable
9.65 2
Interest Revenue
9.65 3
Interest accrued on notes 4
receivable 5 6 7 8 9 10 11

61. NOTES PAYABLE TRANSACTIONS
Four types
Note issued to a supplier to extend time for payment of an account.
Note issued as security for cash loan.
Note paid at maturity.
Note renewed at maturity.

62. NOTE ISSUED TO EXTEND TIME FOR PAYMENT
Example: $700 is owed to Bella & Co. on June 11. Bella & Co. agrees to accept a $700, 90-day, 10% note dated June 11.
The maker would record
this as a Note Payable.

63. The balance owed to Bella & Co. placed into Notes Payable.
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
June 11
Accounts Payable/Bella & Co.
700 2
Notes Payable
700 3
Issued note to settle account 4 5
The balance owed to Bella & Co.
is removed from
Accounts Payable and
placed into Notes Payable. 6 7 8 9 10 11

64. NOTE ISSUED TO EXTEND TIME FOR PAYMENT
Example: A partial payment of $200 is made to Bella & Co. on June 11. A note is issued to Bella & Co. for the remaining $500.
Let’s look at
the Journal
Entry!

65. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 June 11
Accounts Payable/Bella & Co.
700 2
Cash
200 3
Notes Payable
500 4
Made partial payment and 5
issued note to settle account 6 7 8 9 10 11

66. NOTE ISSUED AS SECURITY FOR CASH LOAN
TWO TYPES:
Interest-bearing notes
Face value of note is received in cash, maker pays face value plus interest at maturity.
Non-interest-bearing notes
Interest is deducted in advance, called “discounting”.
Face value minus interest is received in cash, maker pays face value at maturity.

67. INTEREST-BEARING NOTES
EXAMPLE: Borrowed $6,000 on June 16 from Planet Bank on a 60-day, 10.5% note.
Let’s look at
the Journal
Entry!

68. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 June 16 Cash 6,0002
Notes Payable
6,000 3
Issued note for bank loan 4 5 6 7 8 9 10 11

69. NON-INTEREST-BEARING NOTES
EXAMPLE: A non-interest-bearing 60-day note was issued for $6,000 on June 16. The bank discounts at the rate of 10.5%.
The maker will not receive
the whole $6,000.
10.5% x $6,000 x 60/360 = $105 discount
$6,000 - $105 = $5,895

70. Maker receives the proceeds
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
June 16
Cash
5,895 2 3
Maker receives the proceeds
but promised to pay the
maturity value ($6,000). 4 5 6 7 8 9 10 11

71. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 June 16 Cash 5,8952
Discount on Notes Payable
105 3
Notes Payable
6,000 4
Issued note for bank loan 5 6 7 8 9 10 11

72. Maker of the note’s Balance Sheet June 30, 20--
Assets
Current Assets
Liabilities
Current Liabilities
Notes Payable
$6,000
Less: Discount on Notes Payable
105
$5,895
Balance Sheet shows the
Discount on Notes Payable
as a reduction from the
Notes Payable account.

73. STATED vs. EFFECTIVE INTEREST RATE
INTEREST-BEARING NOTE
NON-INTEREST-BEARING NOTE
$105/$6,000 = 1.75%
Interest rate for 60 days

74. STATED vs. EFFECTIVE INTEREST RATE
INTEREST-BEARING NOTE
NON-INTEREST-BEARING NOTE
$105/$6,000 = 1.75%
x 6
10.5%
Effective rate

75. STATED vs. EFFECTIVE INTEREST RATE
INTEREST-BEARING NOTE
NON-INTEREST-BEARING NOTE
$105/$6,000 = 1.75%
x 6
10.5%
Interest-bearing notes….
Effective rate = Stated rate

76. STATED vs. EFFECTIVE INTEREST RATE
INTEREST-BEARING NOTE
NON-INTEREST-BEARING NOTE
$105/$6,000 = 1.75%
$105/$5,895 = 1.781%
x 6
x 6
10.5%
10.686%
Non-Interest-bearing notes….
Effective rate  Stated rate

77. NOTE PAID AT MATURITY
EXAMPLE: The interest-bearing note is paid at maturity.
$6,000 x 10.5% x 60/360 = $105 interest
$6,000 + $105 = $6,105 paid

78. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Aug 15
Notes Payable
6,000 2
Interest Expense
105 3
Cash
6,105 4
Paid note with interest at 5
maturity 6 7 8 9 10 11

79. NOTE PAID AT MATURITY
Now let’s look at the non-interest-bearing note at maturity.
$6,000 maturity value is paid to Payee.
Discount on Notes Payable
becomes Interest Expense.

80. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Aug 15
Notes Payable
6,000 2
Interest Expense
105 3
Cash
6,000 4
Discount on Notes Payable
105 5
Paid note at maturity 6 7 8 9 10 11

81. NOTE RENEWED AT MATURITY
EXAMPLE: The maker pays only $1,000 plus the $105 interest on the $6,000 note and signs a new $5,000, 60-day, 10.5% note.
Old note is removed,
Interest expense of $105 is recognized,
Cash is reduced
and new note is recorded.

82. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 Aug 15
Notes Payable (old note)
6,000 2
Interest Expense
105 3
Cash
1,105 4
Notes Payable
5,000 5
Paid interest and part of old 6
note and issued new note 7 8 9 10 11

83. Multiple notes are recorded on a Notes Payable Register.
Date Issued
Interest
Maker
Time
Due Date
Amount
Rate
Amount
20--
Apr. 14
L. Knoop
60-day
June 13
2,000.00 9%
30.00
May 13
Apex Bank
90-day
Aug 11
8,000.00
10%
200.00
June 2
S. Bront
30-day
July 2
1,500.00
11%
13.75
Multiple notes are recorded
on a Notes Payable Register.

84. NOTES PAYABLE REGISTER
Interest
Date Paid
Amount
Remarks
Rate
Amount
2,000.00 9%
30.00
June 13
Settled 2/14 invoice
8,000.00
10%
200.00
1,500.00
11%
13.75
Settled 4/2 invoice

85. ACCRUED INTEREST PAYABLE
EXAMPLE: Issued a $900, 60-day 10% note on May 31. June 30 is the company’s fiscal year end.
An adjusting entry is needed
on June 30 to record the interest
accrued on the note from
May 31 to June 30.

86. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 June 30
Interest Expense
7.50 2
Accrued Interest Payable
7.50 3
Interest accrued on note 4
payable 5 6 7 8 9 10 11

87. ACCRUED INTEREST PAYABLE
EXAMPLE: If instead it was a $900, 60-day non-interest-bearing note that was discounted at the bank at 10%.
An adjusting entry is needed
on June 30 to move the interest
for the period (May 31 to June 30)
from Discount on Notes Payable
to the Interest Expense account.

88. Journal entry to record
GENERAL JOURNAL
DATE
DESCRIPTION
DEBIT PR
CREDIT 1
May 31
Cash
885 2
Discount on Notes Payable 15 3
Notes Payable
900 4
Issued note for bank loan 5 6
Journal entry to record
note’s issuance 7 8 9 10 11

89. GENERAL JOURNAL DATE DESCRIPTION DEBIT PR CREDIT 1 May 31 Cash 885 2
Discount on Notes Payable 15 3
Notes Payable
900 4
Issued note for bank loan 5 6
June 30
Interest Expense
7.50 7
Discount on Notes Payable
7.50 8
Interest accrued on note 9
payable 10 11