16-1. notes payable and notes receivable section 1: accounting for notes payable chapter 16 section...
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16-1
Notes Payable and Notes
Receivable
Notes Payable and Notes
Receivable
Section 1: Accounting for
Notes Payable
Chapter
16
Section Objectives1. Determine whether an instrument meets all the
requirements of negotiability.
2. Calculate the interest on a note.
3. Determine the maturity date of a note.
4. Record routine notes payable transactions.
5. Record discounted notes payable transactions.McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
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A negotiable instrument is a financial document containing a promise or order to pay, that meets all the UCC requirements to be transferable to another party.
ANSWER:
QUESTION:
What is a negotiable instrument?
Negotiable Instruments
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UCC Requirements for Negotiability
Must be in writing and signed by the maker.
Must contain an unconditional promise to pay a definite amount of money.
Must be payable either on demand or at a future
time that is fixed or that can be determined.
Must be payable to the order of a specific person or to the bearer.
Must clearly name or identify the drawee if addressed to a drawee.
Determine whether an instrument meets all the requirements for negotiability
Objective 1
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A note payable is a liability that represents a written promise by the debtor to pay the creditor a specified amount at a specified future date.
ANSWER:
QUESTION:
What is a note payable?
Notes Payable
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Interest is the fee charged for the use of money.
ANSWER:
QUESTION:
What is interest?
Calculate the interest on a noteObjective 2
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Interest = Principal x Rate x Time
Amount being borrowed (also called face value)
Indicated in fractions of a year
Calculating Interest on a note
Principal x Rate x Time = Interest
$2,500 x 0.12 x (90/360) = $75
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Maturity value is the total amount that must be paid when a note becomes due.
ANSWER:
QUESTION:
What is maturity value?
Determine the maturity date of a note
Objective 3
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Determine the number of days remaining in the month of issue.
Determine the number of days in each full month of the note.
Determine the number of days in the last month of the note.
Add the days together to confirm that they equal the period of the note.
Calculating the Maturity Dateof a Note
Principal + Interest = Maturity Value
$2,500 + $75 = $2,575
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A 90-day note is issued May 18.Number of days remaining in month of issue =
Number of days in each full month of the note =
Maturity date is August 16.
Month of May 31 days Issue Date May 18 – 18 days
Term of note 90 days Days in May – 13 days
May 13 days
77 days June – 30 days July – 31 days
August 16 days
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Month Days
Period of Note 90 days
May 13
Total 90 days
June 30
July 31
Aug 16
Calculating Maturity Date
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Notes Payable TransactionsNotes Payable Transactions
2010
May. 18 Store Equipment 4,000.00
Notes Payable—Trade 4,000.00
Issued note payable to
Unpainted Furniture Inc.
for purchase of store
equipment.
Record the issuance of a note payable.
Record routine notes payable transactions
Objective 4
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2010
Aug 16 Notes Payable—Trade 4,000.00
Interest Expense 80.00
Cash 4,080.00
Payment of May 18
note to Unpainted Furniture Inc.
Record payment of the note payable and interest: Interest rate is 8%, term of note is 90 days.
Notes Payable TransactionsNotes Payable Transactions
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Discounted Notes PayableDiscounted Notes Payable
Face Amount – Discount = Proceeds
$12,000 – $140 = $11,860
Example: If a $12,000, 7% 60-day note is discounted with the bank, then the borrower would receive only $11,860.
$12,000 x 7% x 60/360 = $140 interest
Record discounted notes payable transactions
Objective 5
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Recording a Discounted Note PayableRecording a Discounted Note Payable
2010
June 1 Cash 11,860.00
Interest Expense 140.00
Notes Payable—Bank 12,000.00
To record note payable
issued at a discount
Record issuance of discounted note:
Notice that Interest Expense is debited for the $140 interest paid in advance.
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Recording the payment of a Discounted Note
Recording the payment of a Discounted Note
2010
July 31 Note Payable 12,000.00
Cash 12,000.00
To record the payment of note
payable issued at a discount
Record payment at maturity of a discounted note:
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Reporting Notes Payable and Interest Expense
Notes Payable Current liabilities if due within one year.
Long-term liabilities if due in more than one year.
Interest Expense Classified as a nonoperating expense.
Listed in the Other Income and Expenses section of the income statement.
Notes Payable and Notes
Receivable
Notes Payable and Notes
Receivable Section 2: Accounting for
Notes Receivable
Chapter
16
Section Objectives
6. Record routine notes receivable transactions.
7. Compute the proceeds from a discounted note receivable, and record transactions related to discounting of notes receivable.
8. Understand how to use bank drafts and trade acceptances and how to record transactions related to those instruments.
McGraw-Hill © 2009 The McGraw-Hill Companies, Inc. All rights reserved.
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A note receivable is an asset representing a written promise by the debtor to pay the creditor a specified amount at a specified future date.
ANSWER:
QUESTION:
What is a note receivable?
Record routine notes receivable transactions
Objective 6
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Notes Receivable TransactionsNotes Receivable Transactions
2010
Sept. 18 Notes Receivable 1,600.00
Accounts Receivable/Li Jiunn 1,600.00
To record 30-day note receivable
to replace overdue accounts
receivable.
Record the receipt of a non-interest bearing note receivable.
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Notes Receivable TransactionsNotes Receivable Transactions
2010
June 11 Notes Receivable 1,200.00
Accounts Receivable/Trey Leone 1,200.00
To record 60-day note receivable
to replace an overdue account
receivable.
Record the receipt of an interest bearing note receivable.
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Notes Receivable TransactionsNotes Receivable Transactions
2010
Aug 11 Cash 1,220.00
Note Receivable 1,200.00
Interest Income 20.00
Collection of Trey Leone’s note
plus
(interest= 1,200 x 10% x 60/360 days)
Record the receipt of cash from a customer in payment of their note.
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Partial Collection of a NotePartial Collection of a NotePartial payments are applied first to interest and then to principal. When total cash payment of $620 is paid by the borrower. . .
2010
Aug 11 Cash 620.00
Notes Receivable 600.00 Interest Income 20.00
Collection of interest and
one-half of Trey Leone’s note;
balance renewed for 30 days
Interest = $600 x 10% x 60/360 = $20
100% of interest
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Note ReceivableNot Collected at Maturity
If a note is not paid and not renewed, it is dishonored.
2010
Aug 11 Accounts Rec./Trey Leone 1,220.00 Notes Receivable 1,200.00
Interest Income 20.00
To charge back Leone
dishonored note plus
interest to maturity
Interest income is recognized and added to the account receivable.
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2010
Aug 15 Notes Receivable 1200.00
Sales 1200.00
Received 60-day, 9%
note from Sylvia Madeo
on sale of goods
Note Receivable at the Time of Sale
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Discounting a Note ReceivableDiscounting a Note Receivable
If the noteholder wants cash before the maturity date, the note can be discounted (sold) at the bank.
Compute the proceeds from a discounted note receivable, and record transactions related to discounting of notes receivable
Objective 7
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The bank pays the proceeds to the noteholder.
Principal + Interest – Discount
(Maturity Value)
= Proceeds
Discounting a Note Receivable
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Step 1: Determine the maturity value of the note.
Step 2: Calculate the number of days in the discount period.
Step 3: Compute the discount charged by the bank.
Step 4: Calculate the proceeds.
Calculating the Discount and the Proceeds
The discount period is the period from the date the note is taken to the bank to be discounted (or sold) and continues on to the maturity date.
Discount Period
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Recording a Discounted Note Receivable
2010
Sept. 18 Cash 1,980.00
Interest Expense 20.00
Notes Receivable–Discounted 2,000.00
To record discounting of
Jack Miller note
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A contingent liability is an item that can become a liability if certain future events happen.
ANSWER:
QUESTION:
What is a contingent liability?
Contingent Liability for a Discounted Note
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The note holder endorses the discounted note receivable.
If the maker of the note dishonors the note, the bank can obtain payment from the endorser.
The endorser has a contingent liability.
Contingent Liability for a Discounted Note
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The contingent liability can appear as a separate item on the balance sheet:
Notes Receivable $ 7,400
Notes Receivable – Discounted (2,000)
Reporting Contingent LiabilitiesReporting Contingent Liabilities
Net Notes Receivable $ 5,400
Another common way to report contingent liabilities
is to present net notes receivable on the balance sheet and to include a footnote with information about the discounted notes receivable.
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Discounted Non-interest Bearing Note Receivable at Maturity
2010
Oct. 18 Note Receivable--Discounted 2,000.00
Notes Receivable 2,000.00
To record payment of
discounted note by Jack Miller
If the note is paid at maturity, then the contingent liability is removed from the books.
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Interest-Bearing Note Receivable Discounted
2010
Nov. 28 Cash 1,811.77
Notes Receivable--Discounted 1,800.00
Interest Income 11.77
To record discounting of
Kim Myers note
An $1,800 90-day, 6% note was received from Kim Myers. It was discounted at 10% when there was still 30 days left until maturity.
Proceeds received: $1,800 x 6% x 90/360 = $27 interest. $1,800 + $27 = $1,827 maturity value. $1,827 x 10% x 30/360 = $15.23 discount. $1827 – 15.23 = $1811.77 net cash proceeds received.
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Maturity of Discounted Interest-Bearing Note Receivable
2010
Dec. 28 Notes Receivable--Discounted 1,800.00
Notes Receivable 1,800.00
To record payment by
Myers of discounted note
The $1,800 90-day, 6% note which was received from Kim Myers and was later discounted is paid at maturity by Myers.
Contingent liability is removed from books.
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Notes Receivable
Current asset if due within one year.
Long-term asset if due in more than one year.
Interest Income
Classified as non-operating income.
Listed in the Other Income and Expenses section of the income statement.
Reporting Notes Receivable and Interest Income
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Understand how to use bank drafts and trade acceptances and how to record transactions related to those instruments.
Objective 8
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Draft: a written order that requires one party to pay a stated sum of money to another party
Check
Bank Draft A bank orders another bank to pay the stated amount to a specific party.
It is more readily accepted than a business or personal check.
Commercial Draft One party orders another party to pay a specified amount on a specified date.
It is used for special shipment and collection situations.
Drafts and Acceptances
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Trade Acceptance: a draft used in recording transactions involving the sale of goods
Recorded as a sale on credit
Accounted for as a promissory note
Original transaction
Trade acceptance
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College Accounting, 12th Edition
Price • Haddock • Farina