Chapter 14

Notes Receivable

1
College Accounting
10th Edition
McQuaig Bille Nobles

PowerPoint presented by Douglas Cloud

McQuaig Professor Emeritus of Accounting, Pepperdine University
Bille © 2011 Cengage Learning 14–1
 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.

14–2
Note from a Charge Customer to
Extend Time on Account

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

T accounts for the transaction look like this:

14–4
 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:

14–5
 Receipt of Payment of an Interest-
Bearing Note at Maturity
This entry in T account format follows:

14–6
 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:

14–7
 Note Received as a Result of
Granting a Personal Loan
When the loan reaches maturity, Martin pays the
principal plus interest.

14–8
 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.

14–9
 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.

14–10
Renewal of Note at Maturity
and Payment of Interest

14–11
 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.

14–12
 Renewal of Note with Payment of
Interest and Partial Payment of Principal

14–13
 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.

14–14
Dishonored Notes Receivable

14–15
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.
 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.
14–17
 Discounting Notes
Receivable
 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.

14–18
 Discounting Notes
Receivable
STEP 1. Diagram the situation.

14–19
 Discounting Notes
Receivable
STEP 2. Determine the discount period. The
discount period is the time the
note has left to run.
April 30 – 20 = 10 days left in April
May = 5 days in May
Days held by = 15 days
endorser

14–20
 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

14–21
 Discounting Notes
Receivable
STEP 4. Complete the formula.
Principal $1,800.00
+ Interest (5%, 60 days) 15.00
Value at maturity $1,815.00
– Discount (6%, 45 days) 13.61
Proceeds $1,801.39

$1,800 x 0.05 x 60/360

$1,815 x 0.06 x 45/360
14–22
 Discounting Notes
Receivable
STEP 5. Record the entry.

14–23
 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.

14–24
 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.

14–25
 Payment of Discounted Note
by the Maker—Example 2
STEP 1. Diagram the situation.

14–26
 Payment of Discounted Note
by the Maker—Example 2
STEP 2. Determine the discount period.
April 30 – 24 = 6 days left in April
May = 4 days in May
Days held by = 10 days
endorser

14–27
 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

14–28
 Payment of Discounted Note
by the Maker—Example 2
STEP 4. Complete the formula.
Principal $2,500.00
+ Interest (5.5%, 90 days) 34.38
Value at maturity $2,534.38
– Discount (6.5%, 80 days) 36.61
Proceeds $2,497.77

$2,500 x 0.055 x 90/360

$2,534.38 x 0.065 x 80/360
14–29
 Payment of Discounted Note
by the Maker—Example 2
STEP 5. Record the entry.

14–30
 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.

14–31
 Payment of Discounted Note
by the Maker—Example 3
STEP 1. Diagram the situation.

14–32
 Payment of Discounted Note
by the Maker—Example 3
STEP 2. Determine the discount period.
May 31 – 9 = 22 days left in May
June = 2 days in May
Days held by = 24 days
endorser

14–33
 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

14–34
 Payment of Discounted Note
by the Maker—Example 3
STEP 4. Complete the formula.
Principal $4,500.00
+ Interest (6%, 60 days) 45.00
Value at maturity $4,545.00
– Discount (6.5%, 36 days) 29.54
Proceeds $4,515.46

$4,500 x 0.06 x 60/360

$4,545 x 0.065 x 36/360
14–35
 Payment of Discounted Note
by the Maker—Example 3
STEP 5. Record the entry.

14–36
 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.

14–37
Notes Receivable Register

14–38
 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

14–39
 End-of-Fiscal-Period Adjustments:
Accrued Interest on Notes Receivable

Nov. 30 – 28 = 2 days left in November

Dec. = 31 days in December

Total = 33 days left in the fiscal period

14–40
 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 0.055 x 11/360 = $10.92
14–41
 End-of-Fiscal-Period Adjustments:
Accrued Interest on Notes Receivable

14–42
Effect of Adjusting Entry