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College Accounting. Heintz & Parry 20 th Edition. 17. Accounting for Notes and Interest. 1. Describe a promissory note. PROMISSORY NOTE. A written promise to pay a specific sum at a definite future date Also called a “note” - PowerPoint PPT Presentation
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College AccountingCollege Accounting
Heintz & ParryHeintz & Parry2020thth Edition Edition
Heintz & ParryHeintz & Parry2020thth Edition Edition
ChapterChapter 1717
Accounting for Notes and Interest
Accounting for Notes and Interest
1
Describe a
promissory note.
PROMISSORY NOTEPROMISSORY 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
©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 NOTEPROMISSORY NOTE
$ 2,500.00 PRINCIPAL
©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 NOTEPROMISSORY NOTE
$ 2,500.00 June 9, 20 - -Date of the note
©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 NOTEPROMISSORY NOTE
$ 20
AFTER DATE I PROMISE TO PAY TO
Term of
the note2,500.00 June 9, - -
Ninety Days
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PROMISSORY NOTEPROMISSORY NOTE
$ 20
AFTER DATE PROMISE TO PAY TO
THE ORDER OF Central Bank PAYEE
2,500.00 June 9, - -
Ninety Days I
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PROMISSORY NOTEPROMISSORY 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
INTERESTRATE
June 9, - -
Ninety Days I
Central Bank
Notes may beinterest bearing or
non-interest bearing.
2,500.00
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PROMISSORY NOTEPROMISSORY NOTE
$ 20
AFTER DATE PROMISE TO PAY TO
THE ORDER OF
PAYABLE AT
WITH INTEREST AT
No. 2307 Due Sept. 7, 20--
2,500.00 June 9, - -
Ninety Days I
Central Bank
Two Thousand Five Hundred and 00/100
Central Bank
9% per Annum from DateMATURITY
DATE
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PROMISSORY NOTEPROMISSORY NOTE
$ 20
AFTER DATE PROMISE TO PAY TO
THE ORDER OF
PAYABLE AT
WITH INTEREST AT
No. Due Sarah Morney
2,500.00 June 9, - -
Ninety Days I
Central Bank
Two Thousand Five Hundred and 00/100
Central Bank
9% per Annum from Date
2307 Sept. 7, 20--MAKER
OF NOTE
2
Calculate interest on and
determine the due date of
promissory notes.
TERM OF THE NOTETERM 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 isexpressed as months,
TIME is calculated in months.
TERM OF THE NOTETERM 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 expressedas days, the TIME is calculated using
the exact number of days.
COMPUTING THE DUE DATECOMPUTING THE DUE DATE
EXAMPLE: The note signed by Sarah Mornay is dated June 9, 20-- and is due
in 90 days.
STEP #1Start with the month the note was issued.
Days in June 30
COMPUTING THE DUE DATECOMPUTING THE DUE DATE
Days in June 30
Subtract the date the note was issued(do not count the date of issuance).
Deduct date of note (June 9) 9Days remaining in June 21
EXAMPLE: The note signed by Sarah Mornay is dated June 9, 20-- and is due
in 90 days.
COMPUTING THE DUE DATECOMPUTING THE DUE DATE
Days in June 30Deduct date of note (June 9) 9Days remaining in June 21Add: Days in July 31
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.
COMPUTING THE DUE DATECOMPUTING THE DUE DATE
Days in June 30Deduct date of note (June 9) 9Days remaining in June 21Add: Days in July 31
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.
COMPUTING THE DUE DATECOMPUTING THE DUE DATE
Days in June 30Deduct date of note (June 9) 9Days remaining in June 21Add: Days in July 31
Days in August 31
STEP #3Subtract 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.
COMPUTING THE DUE DATECOMPUTING THE DUE DATE
Days in June 30Deduct date of note (June 9) 9Days remaining in June 21Add: Days in July 31
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.
COMPUTING THE DUE DATECOMPUTING THE DUE DATE
Days in June 30Deduct date of note (June 9) 9Days remaining in June 21Add: Days in July 31
Days in August 31Maturity date, September 7 7
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.
COMPUTING THE DUE DATECOMPUTING THE DUE DATE
Days in June 30Deduct date of note (June 9) 9Days remaining in June 21Add: Days in July 31
Days in August 31Maturity date, September 7 7
Total time in days 90
EXAMPLE: The note signed by Sarah Mornay is dated June 9, 20-- and is due
in 90 days.
CALCULATING INTERESTCALCULATING INTEREST
FORMULA:
PRINCIPAL RATE TIME
$2,500.00 9% 90/360
$56.25interest
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.
CALCULATING INTERESTCALCULATING INTEREST
FORMULA:
PRINCIPAL RATE TIME
$2,000.00 8% 3/12
EXAMPLE: A $2,000, 8% note due in 3 months
$40interest
3
Account for notes
receivable transactions
and accrued interest.
NOTES RECEIVABLE TRANSACTIONS
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
NOTE RECEIVED IN EXCHANGE FOR ASSETS
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.
©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 JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
June 1 Notes Receivable 8,500
Sales 8,500
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--
©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 JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Nov. 28 Cash 8,882.50
Notes Receivable 8,500.00
Received principal and interest
Assume 180 days later, Williams Manufacturing pays the maturity value
of the note (principal plus interest).
20--
Interest Revenue 382.50
NOTE RECEIVED TO EXTEND TIME FOR PAYMENT
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 toaccept this note?
NOTE RECEIVED TO EXTEND TIME FOR PAYMENT
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
©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 JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
June 8 Notes Receivable 2,000
Accts. Receivable/M. Putter 2,000
Received note to settle
account
Mr. Putter’s balance is removedfrom Accounts Receivable andplaced into Notes Receivable.
20--
NOTE RECEIVED TO EXTEND TIME FOR PAYMENT
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 atthe journal
entry!
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
June 8 Cash 250
Accts. Receivable/M. Putter 2,000
Notes Receivable 1,750
Received cash and note
to settle account
20--
NOTE COLLECTED AT MATURITYNOTE 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
NOTE COLLECTED AT MATURITYNOTE 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
NOTE COLLECTED AT MATURITYNOTE 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
$2,050Maturity value
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sept. 6 Cash 2,050
Notes Receivable 2,000
Interest Revenue 50
Received payment of note
with interest
20--
NOTE COLLECTED AT MATURITYNOTE 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.
©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 JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
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--
NOTE RENEWED AT MATURITYNOTE 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.
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sept. 6 Cash 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--
NOTE RENEWED AT MATURITYNOTE 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.
©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 JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sept. 6 Cash 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--
NOTE DISCOUNTED BEFORE MATURITY
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”
NOTE DISCOUNTED BEFORE MATURITY
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%.
Calculatingthe discount and
proceeds is a four-step process.
NOTE DISCOUNTED BEFORE MATURITY
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=
NOTE DISCOUNTED BEFORE MATURITY
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 July 31Less: Discount date 8
The discount date is notcounted in the discount period.
NOTE DISCOUNTED BEFORE MATURITY
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 July 31Less: Discount date 8Remaining days in July 23Plus days in August 31Plus due date (Sept.) 6Days in discount period 60
NOTE DISCOUNTED BEFORE MATURITY
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
ValueDiscount
RateDiscount Period
Discount Amount
=
$2,050 12% 60/360 $41=
NOTE DISCOUNTED BEFORE MATURITY
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 thediscounting of this note.
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
July 8 Cash 2,009
Notes Receivable 2,000
Interest Revenue 9
Discounted note receivable
What if the proceeds are less thanthe face value of the note?
20--
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
July 8 Cash 1,992
Notes Receivable 2,000
Interest Expense 8
Discounted note receivable
The difference representsinterest expense.
20--
NOTE DISHONOREDNOTE 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
NOTE DISHONOREDNOTE 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.
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sept. 6 Accounts Receivable/Putter 2,050
Notes Receivable 2,000
The entire maturity value isdebited to Accounts Receivable.
Interest Revenue 50
Note receivable dishonored
20--
NOTE DISHONOREDNOTE 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 torecover the maturity value
PLUS the bank fee from the maker.
©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 JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Sept. 6 Accounts Receivable/Putter 2,060
Cash 2,060
Paid bank for dishonored
note, including a $10 bank fee.
20--
COLLECTION OF A DISHONORED NOTE
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 maturityvalue, bank fee, and additional
interest at 10% for the period sincedishonoring the note.
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Oct. 16 Cash 2,082.89
Principal$2,000
Interest Bank Fee$50 $10 $2,060
$2,060 10% 40/360 $22.89
$2,060 $22.89 $2,082.89
++
++
=
× × =
+ =
20--
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Oct. 16 Cash 2,082.89
Accounts Receivable 2,060.00
Interest Revenue 22.89
Collected dishonored note
with interest
20--
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DateRcvd. Maker Time Due Date Amount
InterestNOTES RECEIVABLE REGISTER
20--Apr. 4 L. Peters 60 days June 3 400.00
Rate Amount
8% 5.33
21 J. Slaw 60 days June 21 600.00 9% 9.00
May 2 S. Alpart 30 days June 1 700.00 9% 5.25
19 L. Shein 90 days Aug. 17 800.00 9% 18.00
June 20 J. Slaw 60 days Aug. 19 500.00 9% 7.50
When a business has many notes,it may keep a notes receivable
register.
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DiscountedInterest
NOTES RECEIVABLE REGISTER
Rate Amount8% 5.33
Bank DateDate
Collected RemarksJune 3
9% 9.00 June 20 Renewal for $500
9% 5.25 June 1 Sent for collection 5/30
9% 18.00
9% 7.50 Renewal of 4/21 note
ACCRUED INTEREST RECEIVABLEACCRUED 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
ACCRUED INTEREST RECEIVABLEACCRUED 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.
PrincipalDate of Issue
Rate of Interest
Days from Issue Date to June 30
Accrued Interest June 30
$800.00 May 19 9% 42 $8.40
$800.00 × 9% × 42/360
ACCRUED INTEREST RECEIVABLEACCRUED 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.
PrincipalDate of Issue
Rate of Interest
Days from Issue Date to June 30
Accrued Interest June 30
$800.00 May 19 9% 42 $8.40$500.00 June 20 9% 10 1.25
$9.65
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
June 30 Accrued Interest Receivable 9.65
Interest Revenue 9.65
Interest accrued on notes
receivable
20--
4
Account for notes payable
transactions and accrued
interest.
NOTES PAYABLE TRANSACTIONSNOTES 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
NOTE ISSUED IN EXCHANGE FOR ASSETS
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 recordthis as a note payable.
©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 JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
June 1 Purchases 4,000
Notes Payable 4,000
Issued note for inventory
purchase
20--
NOTE ISSUED TO EXTEND TIME FOR PAYMENT
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.
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
June 11 Accounts Payable/Bella & Co. 700
Notes Payable 700
Issued note to settle account
The balance owed to Bella & Co.is removed from Accounts Payable and
placed into Notes Payable.
20--
NOTE ISSUED TO EXTEND TIME FOR PAYMENT
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 atthe journal
entry!
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
June 11 Accounts Payable/Bella & Co. 700
Notes Payable 500
Cash 200
Made partial payment and
issued note to settle account
20--
NOTE ISSUED AS SECURITY FOR CASH LOAN
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
INTEREST-BEARING NOTESINTEREST-BEARING NOTES
EXAMPLE: Borrowed $6,000 on June 16 from Planet Bank on a 60-day, 10.5%
note.
Let’s look atthe journal
entry!
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
June 16 Cash 6,000
Notes Payable 6,000
Issued note for bank loan
20--
NON-INTEREST-BEARING NOTESNON-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 receivethe whole $6,000.
(10.5% $6,000 60/360 = $105 discount;$6,000 – $105 = $5,895)
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GENERAL JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
June 16 Cash 5,895
The maker receives the proceeds but promised to
pay the maturity value ($6,000).
20--
©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 JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
June 16 Cash 5,895
Notes Payable
Discount on Notes Payable 105
6,000
Issued note for bank loan
20--
©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 SheetJune 30, 20--
Maker of the Note Balance SheetJune 30, 20--
AssetsCurrent assets
Liabilities
Notes payableLess: Discount on notes payable
Current liabilities$6,000
105 $5,895
The balance sheet shows the discount on notes payableas a reduction from the notes payable account.
STATED vs. EFFECTIVE INTEREST RATE
STATED vs. EFFECTIVE INTEREST RATE
INTEREST-BEARING NOTE
NON-INTEREST-BEARING NOTE
$105/$6,000 = 1.75%
Interest rate for 60 days
STATED vs. EFFECTIVE INTEREST RATE
STATED vs. EFFECTIVE INTEREST RATE
INTEREST-BEARING NOTE
NON-INTEREST-BEARING NOTE
$105/$6,000 = 1.75%
Effective rate
610.5%
STATED vs. EFFECTIVE INTEREST RATE
STATED vs. EFFECTIVE INTEREST RATE
INTEREST-BEARING NOTE
NON-INTEREST-BEARING NOTE
$105/$6,000 = 1.75%
Interest-bearing notes:Effective rate = Stated rate
610.5%
STATED vs. EFFECTIVE INTEREST RATE
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
610.5%
$105/$5,895 = 1.781% 610.686%
NOTE PAID AT MATURITYNOTE 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
©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 JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Aug. 15 Notes Payable 6,000
Cash
Interest Expense 105
6,105
Paid note with interest at
maturity
20--
NOTE PAID AT MATURITYNOTE PAID AT MATURITY
Now let’s look at the non-interest-bearing note at maturity.
A $6,000 maturity value is paid to thepayee. Discount on Notes Payable
becomes Interest Expense.
©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 JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Aug. 15 Notes Payable 6,000
Cash
Interest Expense 105
6,000
Paid note at maturity
Discount on Notes Payable 105
20--
NOTE RENEWED AT MATURITYNOTE 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.
©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 JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
Aug. 15 Notes Payable (old note) 6,000
Cash
Interest Expense 105
1,105
Paid interest and part of
Notes Payable (new note) 5,000
principal on old note and
issued new note
20--
©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 REGISTERDate
Issued Maker Time Due Date AmountInterest
20--Apr. 14 L. Knoop 60 days June 13 2,000.00
Rate Amount
9% 30.00
13 Apex Bank 90 days Aug. 11 8,000.00 10% 200.00May
2 S. Bront 30 days July 2 1,500.00 11% 13.75June
Multiple notes are recordedin a notes payable register.
©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.
InterestNOTES PAYABLE REGISTER
Rate Amount9% 30.00
Date Paid Remarks
June 13
10% 200.00
Settled 2/14 invoice
11% 13.75 Settled 4/2 invoice
Amount2,000.00
8,000.00
1,500.00
ACCRUED INTEREST PAYABLEACCRUED 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 neededon June 30 to record the interest
accrued on the note fromMay 31 to June 30.
©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 JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
June 30 Interest Expense 7.50
Accrued Interest Payable 7.50
Interest accrued on note
payable
20--
ACCRUED INTEREST PAYABLEACCRUED 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 neededon June 30 to move the interest
for the period (May 31 to June 30)from Discount on Notes Payable
to Interest Expense.
©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 JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
May 31 Cash 885
Discount on Notes Payable 15
Issued note for bank loan
Notes Payable 900
Journal entry to recordthe note’s issuance
20--
©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 JOURNALGENERAL JOURNAL
DATE DESCRIPTION PR DEBIT CREDIT
1
2
3
4
5
6
7
8
9
10
11
May 31 Cash 885
Discount on Notes Payable 15
Issued note for bank loan
Notes Payable 900
June 30 Interest Expense 7.50
Discount on Notes Payable 7.50
Interest accrued on note
payable
20--