Transcript Ch. 4 Notes Receivable - Central Magnet School

CH. 4 NOTES RECEIVABLE
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
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
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
Days of Month – outside columns
Days of year – inside columns
Problem:
90 day note issued on May 16th
Due date?
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
INTEREST TABLE
$1,800.00, 90 day note at 12 %
1800 / 100 = 18
18 x 2.958904 = $53.26
NOTES RECEIVABLE
RECORDING CASH RECEIPTS ON NOTES
DISHONORED NOTES
Notes Receivable Past Due
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
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
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
RECORDING PAID DIS. NOTES REC.
Only Notes Rec. Discounted and Notes Rec. are affected for the
face value amount
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.
RECORDING A DISHONORED DIS. NOTE
The endorser owes the face value, interest, and protest fee
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
RECORDING ACCRUED INTEREST
1000 x .09 x (30/395) = $7.40
PAYMENT FOR ACCRUED INTEREST
1000 x .09 x (90/365) = 22.19
22.19 – 7.40 = 14.76