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Chapter 14 Notes Receivable

Chapter 14 Notes Receivable. Main Points Promissory Notes Maturity Date Duration of Notes Maturity Value Discount of Notes Time Allocated: 4 Periods. Learning Objectives. In this chapter the students will learn:

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Chapter 14 Notes Receivable

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  1. Chapter 14Notes Receivable Main Points • Promissory Notes • Maturity Date • Duration of Notes • Maturity Value • Discount of Notes Time Allocated: 4 Periods

  2. Learning Objectives In this chapterthe students will learn: • how to calculate maturity date of promissory notes. • how to calculate the duration of notes. • how to calculate maturity value of notes. • how to calculate discount of notes and proceeds of discounting.

  3. Revision (1) Questions (I) 1. Will all the customers be able to keep their promises to pay in the future when companies sell goods on credit? 2. What are the accounts that can’t be collected called? 3. What will be recorded against the revenues if the accounts can’t be collected? 4. What is a contra account to accounts receivable?

  4. Revision (1.1) Questions & Answers (I): 1. Will all the customers be able to keep their promises to pay in the future when companies sell goods on credit? Not really. Some customers will not be able to keep their promises to pay because of various circumstances. 2. What are the accounts that can’t be collected called? The accounts that can’t be collected are called uncollectible accounts or bad debts. 3. What will be recorded against the revenues if the accounts can’t be collected? If the accounts can’t be collected, the uncollectible accounts expense will be recorded against the revenues. 4. What is a contra account to accounts receivable? The allowance for uncollectible accounts is a contra account to accounts receivable.

  5. Revision (2) Questions (II): 1. Does the method consider that the longer a receivable is outstanding, the less likely it is to be collected? 2. How are individual customer account balance categorized when using an aging of accounts receivable?

  6. Revision (2.2) Questions & Answers (II): 1. Does the method consider that the longer a receivable is outstanding, the less likely it is to be collected? Yes, it does. 2. How are individual customer account balance categorized when using an aging of accounts receivable? When using an aging of accounts receivable, individual customer account balance are categorized according to the length of time they have been outstanding.

  7. Revision (3) Questions (III): 1. What does the statement of the owner’s equity tell the readers ? 2. Does Statement of Owner’s Equity show the investment the owner has made and how much the owner has withdraw from the company?

  8. Revision (3.1) Questions & Answers (III): 1. What does the statement of the owner’s equity tell the readers ? The statement of the owner’s equity tells the readers the total capital the company owns for a period of time. 2. Does Statement of Owner’s Equity show the investment the owner has made and how much the owner has withdraw from the company? Yes, it does.

  9. Revision (4) Questions (IV): 1. What is a balance sheet? 2. What important uses does the balance sheet have?

  10. Revision (4.1) Questions & Answers (IV): 1. What is a balance sheet? A balance sheet is a statement of the financial condition at a given point in time. It shows the company’s financial position. 2. What important uses does the balance sheet have? The balance sheet has the following important uses: 1) The balance sheet indicates the business net worth. 2) The balance sheet can help determine if too much or too little capital is tied up in permanent investments by comparing total current assets to total non-current assets. 3) The balance sheet gives information on how best to meet liabilities.

  11. What? Warm-up Discussion: 1. What is a promissory note? A promissory note is a written promise to pay a definite sum of money at a fixed future date. 2. Are all the promissory notes interest-bearing notes? No, not really. Some of them are non-interest-bearing notes.

  12. Presentation Notes receivable arise from the credit sale just like accounts receivable, but it’s more formal. Often the debtor signs a promissory note, which serves ad evidence of the debt. A promissory note is an unconditional promise to pay a definite sum of money on demand or at a future date. The person who signs the note and thereby promises to pay is called the maker of the note. The person who payment is to be made is called the payee. Promissory can be resold to banks or other financial departments for cash. When we mention notes receivable, maturity date, duration, interest rate, maturity value, discount and proceeds must be considered.

  13. 1. Maturity Date Questions: 1. What is Maturity date? 2. How can the maturity date be calculated? 3. Can the calculation of maturity date include both of the maturity date and the issue date? 4. If a note is issued on March 18 that will be due in three months, what is the maturity date of the note?

  14. 1.2 Maturity Date Questions & Answers: 1. What is Maturity date? Maturity Date is the date on which the note must be paid. It must be stated on the promissory note. 2. How can the maturity date be calculated? The maturity date can be calculated according to 3 methods: 1) a specific date, such as “ November 11, 20×6” 2) a specific number of months after the date of the note, such as “ 2 months after date” 3) a specific number of days after the date of the note for example, “ 60 days after date” 3. Can the calculation of maturity date include both of the maturity date and the issue date? No, it can’t. It could only include either of them. 4. If a note is issued on March 18 that will be due in three months, what is the maturity date of the note? The maturity date of the note is June 18.

  15. 1.3 Illustrations • A note dated on October 3, and due in 60 days. What date would the note be due? Calculation: ( Including the maturity date and excluding the issue date) Days left in October 28 days Days in November 30 days Days in December 2 days Total 60 days

  16. 1.4 Illustrations ( Including the issue date and excluding the maturity date) Days left in October 29 days Days in November 30 days Days in December 1 days Total 60 days The note would be due on December 2.

  17. 2. Duration of Notes Questions: 1. How is the interest of notes calculated? 2. How to calculated the number of days of duration when the maturity date is determined on the specific date?

  18. 2.1 Duration of Notes Questions & Answers: 1. How is the interest of notes calculated? The interest of notes is calculated on the basis of the number of days. 2. How to calculated the number of days of duration when the maturity date is determined on the specific date? It’s important to include the issue date and exclude the maturity date or exclude e the issue date and include the maturity date.

  19. 2.3 Illustrations 1. The note is issued on September 6 and the maturity date is December 11. What’s the length of the duration? ( Including the maturity date and excluding the issue date) Days left in Sept. 24 days Days in October 31 days Days in November 30 days Days in December 11 days Total days 96 days

  20. 2.3 Illustrations ( Including the issue date and excluding the maturity date) Days left in Sept. 25 days Days in October 31 days Days in November 30 days Days in December 10 days Total days 96 days

  21. 3. Maturity Value Questions: 1. What is the maturity value of the notes if the note is non-interest note? 2. What does the maturity value consist of if the notes is an interest-bearing one? 3. How is interest of a note calculated? What’s the formula to calculate the interest? 4. What’s the formula to compute the maturity value?

  22. 3.1 Maturity Value Questions & Answers: 1. What is the maturity value of the notes if the note is non-interest note? If the note is non-interest note, the maturity value of the notes is the face value or principal. 2. What does the maturity value consist of if the notes is an interest-bearing one? If the notes is an interest-bearing one, the maturity value consist of the face value and interest. 3. How is interest of a note calculated? What’s the formula to calculate the interest? Interest of a note is calculated on the basis of the principal, the rate of interest and length of time. The formula is: Interest = Principal × Rate of Interest × Time 4. What’s the formula to compute the maturity value? The formula is: Maturity Value = Principal + Interest = Principal + Principal × Rate of Interest × Time

  23. 3.2 Illustration • How to compute the maturity value of a 60-day, 6%, $4,000 note? Maturity Value = Principal + Interest = Principal + Principal× Rate of Interest × Time Maturity Value = $4,000 + $4,000 ×6% ×60/360 = $4,000 + $40 = $4,040

  24. 4. Discount of Notes Questions: 1. Can a company discount the note to a bank or other financial units if the company bearing a note needs cash? 2. What does to discount a note mean? 3. What does the amount the payee receives called when a note is discounted? 4. What’s the formula to calculate discount? 5. What’s the formula to calculate proceeds? 6. Does the time in the formula mean the number of days past or the number of days remaining until the maturity date?

  25. 4.1 Discount of Notes Questions & Answers: 1. Can a company discount the note to a bank or other financial units if the company bearing a note needs cash? Yes, it can. 2. What does to discount a note mean? To discount a note means to take out the interest in advance. 3. What does the amount the payee receives called when a note is discounted? When a note is discounted, the amount the payee receives is called proceeds.

  26. 4.1.1 Discount of Notes 4. What’s the formula to calculate discount? Discount = Maturity Value × Interest Rate ×Time 5. What’s the formula to calculate proceeds? Proceeds = Maturity Value – Discount = Maturity Value – Maturity Value × Interest Rate × Time = Maturity Value × (1- Interest Rate ×Time) 6. Does the time in the formula mean the number of days past or the number of days remaining until the maturity date? The time in the formula means the number of days remaining until the maturity date.

  27. 4.2 Illustration 1. Suppose that a 90-day note has a maturity value of $2,000, is due in 60 days, and is discounted at 6 % rate of interest. What’s the amount of proceeds? Proceeds = Maturity Value × (1- Interest Rate ×Time) Proceeds = $ 2,000 × ( 1- 6% ×60/360) = $ 2,000 × 99% = $1,980

  28. 4.2 Illustration 2. A $4,000, 90-day note bearing 8% rate of interest, is discounted at 10 % on the date 30 days before the maturity date. Calculate maturity value, discount and proceeds of discounting. 1) Maturity Value = Principal + Interest = $4,000 + $4,000 × 8% × 90/360 = $ 4,080 2) Discount = Maturity Value ×Discount Rate ×Time = $ 4,080 × 10% × 30/360 = $ 34 3) Proceeds = Maturity Value – Discount = $ 4,080 – $ 34 = $ 4,046

  29. 4.2.1 Illustration 3. 1) Assume that a $4,000, 8%, 90-day note is received from a customer on August 1. Make entries to record the transaction. August 1 Dr. Notes Receivable $4,000 Cr. Revenues from Sales $4,000 2) The note including interest is collected 90 days later. October 30 Dr. Cash $ 4,320 Cr. Notes Receivable $4,000 Interest Income 320

  30. 4.2.2 Illustration 3) If the note is dishonored, the payee or holder of the note will transfer the notes receivable and interest income to accounts receivable. How to make entry for the transaction? October 30 Dr. Accounts Receivable $ 4320 Cr. Notes Receivable $4,000 Interest Income 320

  31. 4.2.3 Illustration • If the company discounts the note on September 30 and the discount rate is 10%. How to make entry for the transaction? September 30 Dr. Cash $4,284 Cr. Notes Receivable $4,000 Interest Income 284 Maturity value = $4,000 + $320 = $4,320 Discount = $4,320 ×10% ×30/360 = $36 Proceeds from discounted note receivable = $4,320 - $36 = $4,284

  32. 5. In-class Activities 1. Do further reading on Page 97-100 and get more information aboutNotes Receivable. 2. Do Exercise One and Exercise Two in Class. 3. Further discuss the question in Exercise Five on Page 102 with your partners.

  33. 5.1 In-class Activities Answers for Exercises: Exercise one: November 23 Exercise Two: Duration = 27 + 30 + 12 = 69 days Maturity Value = $60,000 + $ 60,000 × 6% × 69/360 =$60,690

  34. 5.2 In-class Activities Exercise Five: 1. What is a promissory note? Who is the maker? Who is the payee? A promissory note is an unconditional promise to pay a definite sum of money on demand or at a future date. The person who signs the note and thereby promises to pay is called the maker of the note. The person to whom payment is to be made is called the payee. 2. Which of notes receivable and accounts receivable is more formal? Why? Notes receivable is more formal because the debtor often signs a promissory note, which serves as evidence of the debt. Promissory notes can be resold to banks or other financial departments for cash.

  35. 6. Homework 1. Review Chapter 14 to get further understanding. 2. Do Exercise Three and Exercise Four on Page 102 and write assignment. 3. Preview Chapter 15.

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