Recording Notes Receivable

1. Recording Notes Receivable Georgia CTAE Resource Network Instructional Resources Office Written by: Dr. Marilynn K. Skinner May 2009

2. Recording a note receivable Johnson Company issues a note to Brown Company. The note’s face value is $4,000, the interest rate is 10%, and the term is 90 days. Record the issue of the note: Note receivable 4000.00 Cash 4000.00

3. Record Payment of note • Johnson Company issues a note to Brown Company. The note’s face value is $4,000, the interest rate is 10%, and the term is 90 days. When Brown pays the note at maturity record it as Cash 4100.00 Note receivable 4000.00 Interest income 100.00 (4000X10%X90/360)

4. Note Made for Accounts Receivable Johnson Company issues a note to Brown Company for the accounts receivable they owe them. The note’s face value is $4,000, the interest rate is 10%, and the term is 90 days Note Receivable 4000.00 Accounts Receivable 4000.00

5. Dishonored Notes Receivable Johnson Company issues a note to Brown Company. The note’s face value is $4,000, the interest rate is 10%, and the term is 90 days. The note is dishonored Notes Receivable Past Due 4100.00 Notes Receivable 4000.00 Interest Income 100.00

6. Discounting Notes Receivable Johnson Company issues a note to Brown Company. The note’s face value is $4,000, the interest rate is 10%, and the term is 90 days. After 30 days Johnson Company discounts the note to the bank at 15%. Calculate the maturity value of the note, the proceeds paid to Johnson by the bank, and the profit or loss from discounting the note.

7. Discounting calculations 1. Face value of note $4,000.00 2. Interest to maturity($4,000 x 0.10 x 90/360) 100.00 3. Maturity value of note $4,100.00 4. Discount ($4,100 x 0.15 x 60/360) (102.50) 5. Proceeds $3997.50 6. Accrued interest revenue: $34 7. Book value of note ($4,000 + $34) (4,034.00) 8. Loss from discounting of note $ (36.50)

8. Record Discounted Note Cash in bank 3997.50 Interest Expense 102.50 Notes Receivable Discounted 4000.00 Interest Income 100.00

9. Record Payment of Discounted Notes Receivable Brown paid the bank the amount owed at the end of the note’s term. Johnson would record the note as follows: Note Receivable Discounted 4000.00 Note Receivable 4000.00

10. Record Dishonored Note Receivable Brown Company did not pay the note after it was discounted to the bank, so Johnson Company must pay the bank and would record it like this: Note Receivable Past Due 4100.00 Miscellaneous expense 25.00 Cash in Bank 4125.00

11. Accounting for Accrued Interest The note that Johnson Company made with Brown Company was made on December 1. Report the interest accrued on December 31. Interest Receivable* 34.00 Interest Income 34.00 *(4000 X 10% X 30/360)

12. Entry for Payment of Note When Interest is Accrued Record the payment of the note on March 1 when interest was accrued on December 31. Cash in Bank 4100.00 Note Receivable 4000.00 Interest Receivable 34.00 Interest Income 66.00

13. Glossary of Terms Dishonored note – Maker fails to pay at maturity Bank discount – Share of interest deducted in advance by bank when it purchases a note receivable Proceeds – Net amount bank pays for note receivable Contingent Liability – Agreement to pay a note if the maker doesn’t

14. Glossary of Terms Discount Period – number of days in the term of the note less the number of days the business held the note Protest Fee – Bank charge associated with a dishonored discounted note receivable Accrual Basis – Revenues are recorded when earned and expenses are recorded when incurred – helps match revenues with expenses

15. Glossary of Terms Accrued Revenue – Revenue earned but not received Draft – An order by one party (the drawer) to another party (the drawee) to pay a certain sum of money to a third party (the payee). Trade Acceptance – a special form of draft that arises out of the sale of merchandise and has this noted on its face