McGraw-Hill/Irwin
1-1
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.
16-1
Chapter
16
Notes Payable and Notes
Receivable
Section 1: Accounting for
Notes Payable
Section Objectives
1.
Determine whether an instrument meets all the
requirements of negotiability.
2.
Calculate the interest on a note.
3.
Determine the maturity date of a note.
4.
Record routine notes payable transactions.
5.
Record discounted notes payable transactions.
16-2
Determine whether an instrument meets
Objective 1 all the requirements for negotiability
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.
16-3
Calculating Interest on a note
Interest = Principal x Rate x Time
Amount being borrowed
(also called face value)
Principal x Rate x Time
$4,000
Indicated in fractions
of a year
=
x 0.08 x (90/360) =
Interest
$80
16-4
Calculating the Maturity Date
of a Note
Principal + Interest =
$4,000
+
$80
=
Maturity Value
$4,080

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.
16-5
Objective 4
Record routine notes payable
transactions
Notes Payable Transactions
Record the issuance of a note payable
2013
May. 18
Store Equipment
Notes Payable—Trade
Issued note payable to
Unfinished Furniture, Inc.,
for purchase of store
equipment
4,000.00
4,000.00
16-6
Notes Payable Transactions
Record payment of the note payable and interest:
Interest rate is 8%, term of note is 90 days.
2013
Aug 16 Notes Payable—Trade
Interest Expense
Cash
Payment of May 18
note to Unfinished Furniture, Inc.,
4,000.00
80.00
4,080.00
16-7
Record discounted notes payable
Objective 5 transactions
Discounted Notes Payable
Example: If a $10,000, 6% 60-day note is
discounted with the bank, then the
borrower would receive only $9,900.
Face Amount
–
Discount
=
Proceeds
$10,000
–
$100
=
$9,900
$10,000 x 6% x 60/360 = $100 interest
16-8
Recording a Discounted Note Payable
Record issuance of discounted note:
2013
June 1
Cash
Interest Expense
Notes Payable—Bank
To record note payable
issued at a discount
9,900.00
100.00
10,000.00
Notice that Interest Expense is debited for the $100 interest
paid in advance
16-9
Recording the payment of a
Discounted Note
Record payment at maturity of a discounted note:
2013
July 31
Note Payable
Cash
To record the payment of note
payable issued at a discount
10,000.00
10,000.00
16-10
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.
16-11
Chapter
16
Notes Payable and Notes
Receivable
Section 2: 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.
16-12
Objective 6
Record routine notes receivable
transactions
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.
16-13
Notes Receivable Transactions
Record the receipt of an interest bearing note
receivable
2013
June 12
Notes Receivable
Accounts Receivable/John Woods
To record 60-day note receivable
to replace an overdue account
receivable.
1,200.00
1,200.00
16-14
Notes Receivable Transactions
Record the receipt of cash from a customer in
payment of their note
2013
Aug 11
Cash
Note Receivable
Interest Income
Collection of John Woods’s note
plus
(interest= 1,200 x 10% x 60/360 days)
1,220.00
1,200.00
20.00
16-15
Note Receivable
Not Collected at Maturity
If a note is not paid and not renewed, it is
dishonored
2013
Aug 11
Accounts Rec./John Woods
Notes Receivable
Interest Income
To charge back Woods’s
dishonored note plus
interest to maturity
1,220.00
Interest income is recognized and added to
the account receivable
1,200.00
20.00
16-16
Reporting Notes Receivable
and Interest Income


Notes Receivable

Current asset if due within one year.

Long-term asset if due in more than one year.
Interest Income

Classified as non-operating income.

Listed in the Other Income and Expenses
section of the income statement.
16-17
Drafts and Acceptances
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.
16-18
Internal Control of Notes
Payable, Notes Receivables, and
Drafts:
Limit the number of people who can sign notes
for the firm.
Record all notes payable immediately.
Handle drafts as carefully as checks.
Review all past due notes promptly and take
necessary steps, including legal action to insure
payment.
16-19