1. College Accounting Heintz & Parry 20 th Edition

2. Chapter 17 Accounting for Notes and Interest

3. 1 Describe a promissory note.

4. PROMISSORY NOTE 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

5. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PROMISSORY NOTE $ 2,500.00 PRINCIPAL

6. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PROMISSORY NOTE $ 2,500.00June 9, 20- Date of the note

7. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PROMISSORY NOTE $ 20 AFTER DATEI PROMISE TO PAY TO Term of the note 2,500.00June 9, - Ninety Days

8. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PROMISSORY NOTE $ 20 AFTER DATE PROMISE TO PAY TO THE ORDER OF Central Bank PAYEE 2,500.00June 9, - Ninety Days I

9. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PROMISSORY NOTE $ 20 AFTER DATE PROMISE TO PAY TO THE ORDER OF Two Thousand Five Hundred and 00/100 PAYABLE AT Central Bank WITH INTEREST AT 9% per Annum from Date INTEREST RATE June 9, - Ninety Days I Central Bank Notes may be interest bearing or non-interest bearing. 2,500.00

10. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PROMISSORY NOTE $ 20 AFTER DATE PROMISE TO PAY TO THE ORDER OF PAYABLE AT WITH INTEREST AT No. 2307 Due Sept. 7, 20-- 2,500.00June 9, - Ninety Days I Central Bank Two Thousand Five Hundred and 00/100 Central Bank 9% per Annum from Date MATURITY DATE

11. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. PROMISSORY NOTE $ 20 AFTER DATE PROMISE TO PAY TO THE ORDER OF PAYABLE AT WITH INTEREST AT No.Due Sarah Morney 2,500.00June 9, - Ninety Days I Central Bank Two Thousand Five Hundred and 00/100 Central Bank 9% per Annum from Date 2307Sept. 7, 20-- MAKER OF NOTE

12. 2 Calculate interest on and determine the due date of promissory notes.

13. TERM OF THE NOTE The months or days from the date of issue to the 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.

14. TERM OF THE NOTE The months or days from the date of issue to the 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.

15. COMPUTING THE DUE DATE EXAMPLE: The note signed by Sarah Mornay is dated June 9, 20-- and is due in 90 days. STEP #1 Start with the month the note was issued. Days in June30

16. COMPUTING THE DUE DATE Days in June30 Subtract the date the note was issued (do not count the date of issuance). Deduct date of note (June 9) 9 Days remaining in June 21 EXAMPLE: The note signed by Sarah Mornay is dated June 9, 20-- and is due in 90 days.

17. COMPUTING THE DUE DATE Days in June 30 Deduct date of note (June 9) 9 Days remaining in June 21 Add: Days in July31 Days in August 31 STEP #2 Add to the result of step #1 the number of days in as many months as possible without exceeding the time of the note. EXAMPLE: The note signed by Sarah Mornay is dated June 9, 20-- and is due in 90 days.

18. COMPUTING THE DUE DATE Days in June 30 Deduct date of note (June 9) 9 Days remaining in June 21 Add: Days in July31 Days in August 31 By the end of August, 83 days of the note have past. EXAMPLE: The note signed by Sarah Mornay is dated June 9, 20-- and is due in 90 days.

19. COMPUTING THE DUE DATE Days in June30 Deduct date of note (June 9) 9 Days remaining in June 21 Add: Days in July31 Days in August 31 STEP #3 Subtract the result of step #2 from the time of the note (90 – 83). EXAMPLE: The note signed by Sarah Mornay is dated June 9, 20-- and is due in 90 days.

20. COMPUTING THE DUE DATE Days in June30 Deduct date of note (June 9) 9 Days remaining in June 21 Add: Days in July31 Days in August 31 The result is the date of the month the note is due. EXAMPLE: The note signed by Sarah Mornay is dated June 9, 20-- and is due in 90 days.

21. COMPUTING THE DUE DATE Days in June30 Deduct date of note (June 9) 9 Days remaining in June 21 Add: Days in July31 Days in August 31 Maturity date, September 77 The 90th day (Sept. 7th) is called the maturity date. EXAMPLE: The note signed by Sarah Mornay is dated June 9, 20-- and is due in 90 days.

22. COMPUTING THE DUE DATE Days in June30 Deduct date of note (June 9) 9 Days remaining in June 21 Add: Days in July31 Days in August 31 Maturity date, September 77 Total time in days 90 EXAMPLE: The note signed by Sarah Mornay is dated June 9, 20-- and is due in 90 days.

23. CALCULATING INTEREST FORMULA: PRINCIPAL  RATE  TIME $2,500.00  9%  90/360 $56.25 interest EXAMPLE: The note signed by Sarah Mornay has a principal of $2,500, an annual interest rate of 9%, and is due in 90 days.

24. CALCULATING INTEREST FORMULA: PRINCIPAL  RATE  TIME $2,000.00   8% 3/12 EXAMPLE: A $2,000, 8% note due in 3 months $40 interest

25. 3 Account for notes receivable transactions and accrued interest.

26. NOTES RECEIVABLE TRANSACTIONS Seven types: –Note received from a customer in exchange for assets sold –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

27. NOTE RECEIVED IN EXCHANGE FOR ASSETS EXAMPLE: On June 1, Linesch Hardware Co. sells an industrial mower to Williams Manufacturing for $8,500 in exchange for a 180-day, 9% note signed by Williams.

28. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 June1Notes Receivable8,500 Sales8,500 Received note for merchandise sale This is simply a sale in which the buyer signs a note (a promise to pay). Note that the seller will receive interest as well as principal. 20--

29. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Nov.28Cash8,882.50 Notes Receivable8,500.00 Received principal and interest Assume 180 days later, Williams Manufacturing pays the maturity value of the note (principal plus interest). 20-- Interest Revenue382.50

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

31. NOTE RECEIVED TO EXTEND TIME FOR PAYMENT EXAMPLE: Accounts receivable customer, Michael Putter, owes $2,000 to Linesch Hardware Co. To settle this account, Putter signs a 90-day, 10% note dated June 8. Two reasons to accept this note: 1.The note is a formal, written promise to pay –Can be converted to cash at a bank if necessary 2. The note is likely to bear interest

32. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 June8Notes Receivable2,000 Accts. Receivable/M. Putter2,000 Received note to settle account Mr. Putter’s balance is removed from Accounts Receivable and placed into Notes Receivable. 20--

33. 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!

34. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 June8Cash250 Accts. Receivable/M. Putter2,000 Notes Receivable1,750 Received cash and note to settle account 20--

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

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

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

38. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Sept.6Cash 2,050 Notes Receivable2,000 Interest Revenue50 Received payment of note with interest 20--

39. 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 Linesch’s account.

40. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Sept. 6 Cash 2,040 Notes Receivable 10 Interest Revenue 2,000 Received payment of note with interest less collection Collection Expense 50 fee 20--

41. NOTE RENEWED AT MATURITY EXAMPLE: What if Mr. Putter had been able to pay the interest due on the note and asked to renew the note? Linesch Hardware Co. would collect the interest, and accept a new note to replace the original note.

42. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Sept.6Cash 50 Notes Receivable (old note) 2,000 Interest Revenue 2,000 Received new note plus interest on old note Notes Receivable (new note) 50 20--

43. NOTE RENEWED AT MATURITY EXAMPLE: What if Mr. Putter had been able to pay the interest due on the note, pay $500 on the principal, and asked to renew the balance of the note? Linesch Hardware Co. would collect the interest and partial payment, and accept a new note to replace the original note.

44. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Sept.6Cash 550 Notes Receivable (old note) 1,500 Interest Revenue 2,000 Received new note plus partial payment and interest Notes Receivable (new note) 50 on old note 20--

45. 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 –The bank charges an interest fee called a “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”

46. NOTE DISCOUNTED BEFORE 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.

47. NOTE DISCOUNTED BEFORE 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 =

48. NOTE DISCOUNTED BEFORE 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 July31 Less: Discount date8 The discount date is not counted in the discount period.

49. NOTE DISCOUNTED BEFORE 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 July31 Less: Discount date8 Remaining days in July 23 Plus days in August31 Plus due date (Sept.)6 Days in discount period 60

50. NOTE DISCOUNTED BEFORE 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   = $2,050 12%  60/360 $41 =

51. NOTE DISCOUNTED BEFORE 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 = $2,050 $41 = – – Proceeds $2,009 Let’s journalize the discounting of this note.

52. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 July8Cash 2,009 Notes Receivable2,000 Interest Revenue9 Discounted note receivable What if the proceeds are less than the face value of the note? 20--

53. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 July8Cash 1,992 Notes Receivable2,000 Interest Expense8 Discounted note receivable The difference represents interest expense. 20--

54. NOTE DISHONORED The maker of the note does not pay or renew it at maturity The maker is still liable The note loses its legal status The payee transfers the amount due from Notes Receivable to Accounts Receivable

55. 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.

56. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Sept. 6Accounts Receivable/Putter 2,050 Notes Receivable2,000 The entire maturity value is debited to Accounts Receivable. Interest Revenue50 Note receivable dishonored 20--

57. 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.

58. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Sept.6 Accounts Receivable/Putter2,060 Cash2,060 Paid bank for dishonored note, including a $10 bank fee. 20--

59. 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 at 10% for the period since dishonoring the note.

60. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Oct.16Cash2,082.89 Principal $2,000 InterestBank Fee $50$10$2,060 10%40/360$22.89 $2,060$22.89$2,082.89 + + + + = ×× = + = 20--

61. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Oct.16Cash2,082.89 Accounts Receivable2,060.00 Interest Revenue22.89 Collected dishonored note with interest 20--

62. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Date Rcvd. Maker Time Due Date Amount Interest NOTES RECEIVABLE REGISTER 20-- Apr.4L. Peters60 daysJune3400.00 RateAmount 8%5.33 21J. Slaw60 daysJune21600.009%9.00 May2S. Alpart30 daysJune1700.009%5.25 19L. Shein90 daysAug.17800.009%18.00 June20J. Slaw60 daysAug.19500.009%7.50 When a business has many notes, it may keep a notes receivable register.

63. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. DiscountedInterest NOTES RECEIVABLE REGISTER RateAmount 8%5.33 BankDate Date Collected Remarks June 3 9%9.00June20Renewal for $500 9%5.25June1Sent for collection 5/30 9%18.00 9%7.50Renewal of 4/21 note

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

65. 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. Principal Date of Issue Rate of Interest Days from Issue Date to June 30 Accrued Interest June 30 $800.00May 199%42$8.40 $800.00 × 9% × 42/360

66. 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. Principal Date of Issue Rate of Interest Days from Issue Date to June 30 Accrued Interest June 30 $800.00May 199%42$8.40 $500.00June 209%101.25 $9.65

67. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 June30Accrued Interest Receivable9.65 Interest Revenue9.65 Interest accrued on notes receivable 20--

68. 4 Account for notes payable transactions and accrued interest.

69. NOTES PAYABLE TRANSACTIONS Five types: –Note issued to a supplier in exchange for assets purchased –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

70. NOTE ISSUED IN EXCHANGE FOR ASSETS EXAMPLE: On June 1, Linesch Hardware Co. purchases a truckload of trees and shrubs from Evergreen Enterprises and signs a $4,000, 90-day, 9% note in exchange. The maker would record this as a note payable.

71. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 June1Purchases4,000 Notes Payable4,000 Issued note for inventory purchase 20--

72. 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.

73. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 June11Accounts Payable/Bella & Co.700 Notes Payable700 Issued note to settle account The balance owed to Bella & Co. is removed from Accounts Payable and placed into Notes Payable. 20--

74. 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!

75. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 June11Accounts Payable/Bella & Co.700 Notes Payable500 Cash200 Made partial payment and issued note to settle account 20--

76. NOTE ISSUED AS SECURITY FOR CASH LOAN Two types: Interest-bearing notes –The face value of the note is received in cash –The 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 –The maker pays face value at maturity

77. 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!

78. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 June16Cash6,000 Notes Payable6,000 Issued note for bank loan 20--

79. 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%  $6,000  60/360 = $105 discount; $6,000 – $105 = $5,895)

80. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 June16Cash5,895 The maker receives the proceeds but promised to pay the maturity value ($6,000). 20--

81. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 June16Cash5,895 Notes Payable Discount on Notes Payable105 6,000 Issued note for bank loan 20--

82. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Maker of the Note Balance Sheet June 30, 20-- Assets Current assets Liabilities Notes payable Less: Discount on notes payable Current liabilities $6,000 105$5,895 The balance sheet shows the discount on notes payable as a reduction from the notes payable account.

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

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

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

86. STATED vs. EFFECTIVE INTEREST RATE INTEREST-BEARING NOTE NON-INTEREST- BEARING NOTE $105/$6,000 = 1.75% Non-interest-bearing notes: Effective rate  Stated rate  6 10.5% $105/$5,895 = 1.781%  6 10.686%

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

88. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Aug.15Notes Payable6,000 Cash Interest Expense105 6,105 Paid note with interest at maturity 20--

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

90. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Aug.15Notes Payable6,000 Cash Interest Expense105 6,000 Paid note at maturity Discount on Notes Payable105 20--

91. 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. The old note is removed, interest expense of $105 is recognized, cash is reduced, and a new note is recorded.

92. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 Aug.15Notes Payable (old note)6,000 Cash Interest Expense105 1,105 Paid interest and part of Notes Payable (new note)5,000 principal on old note and issued new note 20--

93. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. NOTES PAYABLE REGISTER Date Issued MakerTime Due Date Amount Interest 20-- Apr. 14L. Knoop60 daysJune132,000.00 RateAmount 9%30.00 13Apex Bank90 daysAug.118,000.0010%200.00 May 2S. Bront30 daysJuly21,500.0011%13.75June Multiple notes are recorded in a notes payable register.

94. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Interest NOTES PAYABLE REGISTER RateAmount 9%30.00 Date Paid Remarks June13 10%200.00 Settled 2/14 invoice 11%13.75Settled 4/2 invoice Amount 2,000.00 8,000.00 1,500.00

95. 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.

96. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 June30Interest Expense7.50 Accrued Interest Payable7.50 Interest accrued on note payable 20--

97. 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 Interest Expense.

98. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 May31Cash885 Discount on Notes Payable15 Issued note for bank loan Notes Payable900 Journal entry to record the note’s issuance 20--

99. ©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. GENERAL JOURNAL DATEDESCRIPTIONPRDEBITCREDIT 1 2 3 4 5 6 7 8 9 10 11 May31Cash885 Discount on Notes Payable15 Issued note for bank loan Notes Payable900 June30Interest Expense7.50 Discount on Notes Payable7.50 Interest accrued on note payable 20--