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GLENCOE / McGraw-Hill

GLENCOE / McGraw-Hill. Notes Payable and Notes Receivable. Accounting for Notes Receivable. Section Objectives. 6. Record routine notes receivable transactions.

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GLENCOE / McGraw-Hill

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  1. GLENCOE / McGraw-Hill

  2. Notes Payable and Notes Receivable

  3. Accounting for Notes Receivable Section Objectives 6. Record routine notes receivable transactions. 7. Compute the proceeds from a discounted note receivable, and record transactions related to discounting of notes receivable. 8. Understand how to use bank drafts and trade acceptances and how to record transactions related to those instruments.

  4. Page 590 Notes Receivable

  5. QUESTION: What is a note receivable? ANSWER: A note receivable is an asset representing a written promise by the debtor to pay the creditor a specified amount at a specified future date. Page 590

  6. Page 591 Notes Receivable – Special Situations • Partial collection of a note • Note not collected at maturity • Note received at the time of a sale

  7. 2004 June 13 Cash 468.00 Notes Receivable 450.00 Interest Income 18.00 Collection of interest and one-half of Eli Nagy’s note; balance renewed for 30 days Page 591 Partial Collection of a Note Partial payments are applied first to interest and then to principal.

  8. 2004 June 13 Cash 468.00 Notes Receivable 450.00 Interest Income 18.00 Collection of interest and one-half of Eli Nagy’s note; balance renewed for 30 days Page 591 Partial Collection of a Note Partial payments are applied first to interest and then to principal. 100% of interest

  9. 2004 June 13 Cash 468.00 Notes Receivable 450.00 Interest Income 18.00 Collection of interest and one-half of Eli Nagy’s note; balance renewed for 30 days Page 591 Partial Collection of a Note Partial payments are applied first to interest and then to principal. 50% of principal 100% of interest

  10. 2004 June 13 Accounts Rec./Eli Nagy 918.00 Notes Receivable 900.00 Interest Income 18.00 To charge back Nagy dishonored note plus interest to maturity Page 592 Note Receivable Not Collected at Maturity If a note is not paid and not renewed, it is dishonored.

  11. 2004 June 13 Accounts Rec./Eli Nagy 918.00 Notes Receivable 900.00 Interest Income 18.00 To charge back Nagy dishonored note plus interest to maturity Page 592 Note Receivable Not Collected at Maturity If a note is not paid and not renewed, it is dishonored. Interest income is recognized and added to the account receivable.

  12. 2004 June 13 Accounts Rec./Eli Nagy 918.00 Notes Receivable 900.00 Interest Income 18.00 To charge back Nagy dishonored note plus interest to maturity Page 592 Note Receivable Not Collected at Maturity If a note is not paid and not renewed, it is dishonored. Interest income is recognized and added to the account receivable.

  13. 2004 June 5 Notes Receivable 1200.00 Sales 1200.00 Received 90-day, 10% note from Sylvia Madeo on sale of goods Page 592 Note Receivable at the Time of Sale

  14. Page 592 Discounting a Note Receivable If the noteholder wants cash before the maturity date, the note can be discounted (sold) at the bank.

  15. Page 592 Discounting a Note Receivable The bank pays the proceeds to the noteholder. Principal + Interest – Discount (Maturity Value) = Proceeds

  16. Page 593 Discount Period The discount period is the period from the date the note is taken to the bank to be discounted to the maturity date.

  17. Page 593 Calculating the Discount and the Proceeds Step 1: Determine the maturity value of the note. Step 2: Calculate the number of days in the discount period. Step 3: Compute the discount charged by the bank. Step 4: Calculate the proceeds.

  18. 2004 Sept. 5 Cash 990.00 Interest Expense 10.00 Notes Receivable–Discounted 1000.00 To record discounting of Peter Ellis note Page 593 Recording a Discounted Note Receivable

  19. Page 593 Contingent Liability for a Discounted Note

  20. QUESTION: What is a contingent liability? ANSWER: A contingent liability is an item that can become a liability if certain things happen. Page 593

  21. Page 593 Contingent Liability for a Discounted Note • The noteholder endorses the discounted note receivable. • If the maker of the note dishonors the note, the bank can obtain payment from the endorser. • The endorser has a contingent liability.

  22. Page 595 Reporting Notes Receivable and Interest Income • Notes Receivable • Current assets if due within one year • Long-term assets if due in more than one year • Interest Income • Classified as nonoperating income • Listed in the Other Income and Expenses section of the income statement

  23. Page 593 Reporting Contingent Liabilities • The contingent liability can appear as a separate item on the balance sheet: Notes Receivable $ 2,100 Notes Receivable – Discounted (1,000) Net Notes Receivable $ 1,100 • Another common way to report contingent liabilities is to present net notes receivable on the balance sheet and to include a footnote with information about the discounted notes receivable.

  24. Page 596 Drafts and Acceptances

  25. Page 596 Draft: a written order that requires one party to pay a stated sum of money to another party • Check • Bank Draft • A bank orders another bank to pay the stated amount to a specific party. • It is more readily accepted than a business or personal check. • Commercial Draft • One party orders another party to pay a specified amount on a specified date. • It is used for special shipment and collection situations.

  26. Page 598 Trade Acceptance: a draft used in recording transactions involving the sale of goods Recorded as a sale on credit Original transaction Accounted for as a promissory note Trade acceptance

  27. R E V I E W Complete the following sentences: A note receivable is classified as a(n) _____. asset When a debtor makes a partial payment, payment is first applied to the _______. interest discount period The ______________ is the period from the date the note is discounted at the bank to the maturity date.

  28. R E V I E W Complete the following sentences: contingent liability A ________________ is an item that can become a liability if certain things happen. A discounted note becomes a contingent liability for the ________. endorser trade acceptance A _______________ is a draft used in recording transactions involving the sale of goods.

  29. Thank You for using College Accounting, Tenth Edition Price • Haddock • Brock

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