Ch. 4 Notes Receivable

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Ch. 4 Notes Receivable
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Negotiable instuments

• Negotiable Instrument a document that transfers
  ownership
• A check
• Notes
• Promissory Note a promise to pay at certain
  amount at a certain time

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Promissory notes

• Principal amount borrowed
• Face Value amount written on the note usually
  the Principal amount
• Issue Date date note is signed
• Maturity date date payment is due
• Term the time between issue and maturity date
• Payee who the note is payable
• Maker person who promises to pay

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Determine the maturity date

• If expressed in months then due on the same day
  plus the number of months.
• Ex. May 1st 3 month term due on Aug. 1st
• Ex. Jan 31st 3 month term due Apr. 30th
• Most business use a computer program to attain
  due date.
• Some small businesses us a time table

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Days of Month outside columns Days of year
inside columns Problem 90 day note
issued on May 16th Due date?
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Calculating interest

• Interest Principal x Interest Rate x Time
• Time
• 3 month 3/12 60 days 60/365
• 6 month 6/12 90 days 90/365
• Calculate the interest for
• 1,800.00, 90 day note at 12
• 1800 x .12 x (90/365) 53.26
• Maturity Value 1800 53.26 1,853.26

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Interest table
1,800.00, 90 day note at 12
1800 / 100 18 18 x 2.958904 53.26
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Notes Receivable
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Recording cash receipts on notes
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Dishonored Notes
Notes Receivable Past Due
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Discounting notes receivable

• Selling a note receivable to a bank
• Usually to buy merchandize
• The interest cost is called Bank Discount
• Money received is called Proceeds
• A Contingent Liability protects the bank
• From note dishonor
• A Liability of the business
• Conservative Principal report least likely to
  overstate income
• Discounted notes are liabilities on financial
  statements

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Discounting notes receivable

• To calculate the bank Discount
• Maturity Value x Discount Rate x Discount
  Period Bank Discount
• If we accept a 10,60 day note for 1,500 on July
  15 from Mallary Palmer
• 1500 x .10 x (60/365) 24.66
• Maturity Value 1,524.66
• Then sell the note to DVB bank on July 30 with
  discount rate of 10.5
• 1,524.66 x .105 x (45/365) 19.74

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Discounting notes receivable

• Recording a discounted note
• When a note is discounted it is not removed from
  Notes Rec.
• Notes Rec. Discounted is a contra acct.
• Use the face value of the note

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Recording paid Dis. Notes Rec.
Only Notes Rec. Discounted and Notes Rec. are
affected for the face value amount
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Dishonor of Dis. Notes Rec.

• When the bank doe not receive payment from the
  maker
• Bank usually charges a Protest Fee.
• The endorser (business that sold the note to the
  bank) is liable
• The protest fee is a misc. exp.

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Recording a Dishonored dis. note
The endorser owes the face value, interest, and
protest fee
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Accrual basis of accounting

• Revenue is recognized when earned and expenses
  when incurred
• Accrued revenue is earned revenue not yet
  received
• Adjustments are made to record accrued revenue
• Same formula for notes rec
• Principal x rate x time interest accrued
• Use accounts Interest Receivable Interest
  Income

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Recording accrued interest
1000 x .09 x (30/395) 7.40
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Payment for Accrued interest
1000 x .09 x (90/365) 22.19 22.19 7.40 14.76