Notes receivable

Accounts Receivable are sometimes converted to a Promissory

Note.

Why?
- Help customers in temporary cashflow difficulty
- Provided more legal weight than a regular A/R
- More reliable to anticipate cash flow

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 Notes receivable

Accounts Receivable are sometimes converted to a Promissory

Note.

Why?
- Help customers in temporary cashflow difficulty
- Provided more legal weight than a regular A/R
- More reliable to anticipate cash flow

Interest earned from Promissory Notes are recorded as

“Note Interest Revenue” and “ Note Interest Receivable”
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 Notes receivable

3 transactions to learn with notes receivable

• 1. Acceptance of the Note

• 2. Year end (accruing interest)

• 3. maturity

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 1. Accepting the note

Mr P. owes $1000 to Company A. On January 1st, Mr P offers a

promissory note for the amount owed. He promises to pay in
seven months in full with 5% interest.
Date Description DR CR

Jan 1 Notes receivable 1000

A/R – Mr. P 1000

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 2. Year end (accruing interest)

b) Company A has a year end on June 30th.

How many months since note was issued?
Jan 1st – June 30th = 6 months
How much interest is accrued each month?
1000 X 5 % = $50 per year
50 / 12 = $4.166667 per month

Date Description DR CR

Jun 30
Interest Receivable (6 mths) 25.00
Note Interest Revenue 25.00
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 3. Maturity

c) The note matures 7 months after being accepted. July 30th

How many months since year end?
June 30th – jul 30th = 1 month
interest = $4.166667 per month
Date Description DR CR

July 1029.17
????
30th
Cash

Interest Receivable (6mths) 25.00

Note Interest Revenue (1 mth) 4.17
Note Receivable 1000
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 A customer, who owes $5,000 on account, is having difficulty
paying their obligations. They have agreed to sign a promissory
note. Which of the following is the correct journal entry to
record the promissory note?
Dr. Cr.
Notes Receivable $5,000
A.
Account Receivable $5,000

-Equity decreases by $5,000

B. Accounts Receivable $5,000
Notes Receivable $5,000

-No change to equity

C. Notes Receivable $5,000
Accounts Receivable $5,000
-No change to equity
D. Accounts Receivable $42,500
AFDA $42,500
-No change to equity

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 The promissory note for $5,000 was signed on June 1 at 10% per
annum. On June 30, one months interest is owing but has yet
to be received. Which of the following correctly records the
interest owed?

A. Account Receivable $41.67

Account Receivable $41.67

B. Accounts Receivable $41.67

Interest Receivable $41.67

-No change to equity

C. Interest Receivable $41.67
Interest Revenue $41.67
-No change to equity

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Review Questions

Assume a 6 month, 10% Note Receivable for $10,000 is signed and

recorded in the books on October 1. The company has a December 31
year end. Give the journal entry to record accrued interest on
December 31.

Date Account Title DR CR

Dec. 31 Interest Receivable 250

Interest Revenue 250

Calculation: 10,000 x 10% x 3/12 = 250

Maturity

Assume a 6 month, 10% Note Receivable for $10,000 is signed and

recorded in the books on October 1. The company has a December 31
year end.
Record the receipt of the principal plus interest at maturity

Date Account Title DR CR

Apr. 1 Cash 10, 500

Note Interest Receivable 250
Note Interest revenue 250
Notes Receivable 10,000