Notes Payable and Notes Receivable

2. Chapter 16 Notes Payable and Notes Receivable Section 1: Accounting for Notes Payable Section Objectives • Determine whether an instrument meets all the requirements of negotiability. • Calculate the interest on a note. • Determine the maturity date of a note. • Record routine notes payable transactions. • 5. Record discounted notes payable transactions.

3. Negotiable Instruments

4. QUESTION: What is a negotiable instrument? ANSWER: A negotiable instrument is a financial document containing a promise or order to pay that meets all the UCC requirements to be transferable to another party.

5. The UCC (Uniform Commercial Code) has been adopted by all of the states.

6. Objective 1. • Determine whether an instrument meets all the requirements for negotiability.

7. UCC Requirements for Negotiability • Must be in writing and signed by the maker. • Must contain an unconditional promise to pay a definite amount of money. • Must be payable either on demand or at a future time that is fixed or that can be determined. • Must be payable to the order of a specific person or to the bearer. • Must clearly name or identify the drawee if addressed to a drawee.

8. Notes Payable

9. QUESTION: What is a note payable? ANSWER: A note payable is a liability that represents a written promise by the debtor to pay the creditor a specified amount at a specified future date.

10. Objective 2. • Calculate The Interest On A Note.

11. QUESTION: What is interest? ANSWER: Interest is the fee charged for the use of money.

12. Calculating Interest on a note Interest = Principal x Rate x Time Indicated in fractions of a year Amount being borrowed (also called face value)

13. QUESTION: What is a banker’s year? ANSWER: A banker’s year is a 360-day period used to calculate interest on a note.

14. Calculating Interest Principal x Rate x Time = Interest $2,500 x 0.12 x (90/360) = $75

15. Objective 3. • Determine The Maturity Date of a Note.

16. QUESTION: What is maturity value? ANSWER: Maturity value is the total amount that must be paid when a note becomes due.

17. Calculating Maturity Value Principal + Interest = Maturity Value $2,500 + $75 = $2,575

18. Calculating the Maturity Date of a Note • Determine the number of days remaining in the month of issue. • Determine the number of days in each full month of the note. • Determine the number of days in the last month of the note. • Add the days together to confirm that they equal the period of the note.

19. A 90-day note is issued May 18. Number of days remaining in month of issue = Month of May 31 days Issue Date May 18 –18 days May 13 days Number of days in each full month of the note= Term of note 90 days Days in May –13 days 77 days June –30 days July –31 days August 16 days Maturity date is August 16.

20. Month Days May 13 June 30 July 31 Aug 16 Total 90 days Period of Note 90 days

21. Objective 4. • Record Routine Notes Payable Transactions.

22. 2007 May. 18 Store Equipment 4,000.00 Notes Payable—Trade 4,000.00 Issued note payable to Unpainted Furniture Inc. for purchase of store equipment. Notes Payable Transactions Record the issuance of a note payable.

23. 2007 Aug 16 Notes Payable—Trade 4,000.00 Interest Expense 80.00 Cash 4,080.00 Payment of May 18 note to Unpainted Furniture Inc. Notes Payable Transactions Record payment of the note payable and interest: Interest rate is 8%, term of note is 90 days.

24. Objective 5. • Record Discounted Notes Payable Transactions.

25. QUESTION: What is discounting? ANSWER: Discounting is deducting the interest from the principal of a note in advance.

26. Discounted Notes Payable Example: If a $12,000, 7% 60-day note is discounted with the bank, then the borrower would receive only $11,860. Face Amount – Discount = Proceeds $12,000 – $140 = $11,860 $12,000 x 7% x 60/360 = $140 interest

27. 2007 June 1 Cash 11,860.00 Interest Expense 140.00 Notes Payable—Bank 12,000.00 To record note payable issued at a discount Recording a Discounted Note Payable Record issuance of discounted note: Notice that Interest Expense is debited for the $140 interest paid in advance.

28. 2007 July 31 Note Payable 12,000.00 Cash 12,000.00 To record the payment of note payable issued at a discount Recording the payment of a Discounted Note Record payment at maturity of a discounted note:

29. Reporting Notes Payable and Interest Expense • Notes Payable • Current liabilities if due within one year. • Long-term liabilities if due in more than one year. • Interest Expense • Classified as a nonoperating expense. • Listed in the Other Income and Expenses section of the income statement.

30. R E V I E W Complete the following sentences: A negotiable instrument meets all the _______________________ requirements to be transferable to another party. Uniform Commercial Code liability A note payable is classified as a(n) _______. principal The formula for interest is ________ x ____ x ____. time rate

31. R E V I E W Complete the following sentences: banker’s year A(n) ____________ is a 360-day period used to calculate interest on a note. Discounting is the practice of deducting the _______ from the ________ of a note in advance. principal interest Interest expense appears on the income statement in the ________________ _________ section. Other Income and Expenses

32. Thank You for using College Accounting, 11th Edition Price • Haddock • Brock