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Businesses issue two types of notes:
interest-bearing notes and noninterest-bearing notes. Businesses
record the receipt of a note receivable
as well as the payment of the note.
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Explain how businesses use promissory notes.
Calculate and record notes payable and notes receivable.
Explain the difference between interest-bearing and non-interestbearing notes.
Journalize transactions involving notes payable.
Journalize transactions involving notes receivable.
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Section 26.1
Promissory Notes
Key Terms
promissory note
payee
note payable
interest rate
note receivable
maturity date
principal
maker
face value
interest
term
maturity value
issue date
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A Promise to Pay
Section 26.1
Promissory Notes
Paying for Products
How
Promissory
Notes Are
Used
Paying for Services
Lending
Borrowing
promissory note
A written promise to pay a certain amount of money
at a specific time.
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A Promise to Pay
Section 26.1
Promissory Notes
Note Payable
Two Types of
Promissory Notes
Note Receivable
note payable
A promissory note issued to a creditor.
note receivable
A promissory note that a business accepts
from a customer.
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A Promise to Pay
Section 26.1
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Promissory Notes
See page 755
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A Promise to Pay
Section 26.1
Promissory Notes
Calculating a maturity date using a time calendar
Locate the issue date
in the Day of month
column. Move across
to the issue month to
find the day of the year
(September 14 is 257).
Add the number of
days in the term to the
day of the year
(90+257=347).
Find this number in
the month columns
(347 corresponds to
December 13).
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A Promise to Pay
Section 26.1
Promissory Notes
Time Calendar
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See page 757
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Calculation of
Interest on a Note
Section 26.1
Promissory Notes
Interest on a Promissory Note Is
Based on Three Factors
Principal
Interest Rate
interest
The fee charged for
the use of money
stated as a
percentage of the
principal.
Term of the Note
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Calculation of
Interest on a Note
Section 26.1
Promissory Notes
Calculating Interest Using a Formula
Interest = Principal x Interest Rate x Time
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Calculation of
Interest on a Note
Section 26.1
Promissory Notes
Calculating Interest Using an Interest Table
Find the term of the note in the Day column.
Follow the row until you reach the column for the interest rate.
Where they intersect is the factor (per $100 of principal).
Divide the principal of the note by 100.
Multiply the result by the factor to find the amount of interest.
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Calculation of
Interest on a Note
Section 26.1
Promissory Notes
Calculating Interest Using an Interest Table
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See page 758
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Section 26.2
Notes Payable
Key Terms
long-term liabilities
interest-bearing note payable
non-interest-bearing note payable
bank discount
proceeds
other expense
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Interest-Bearing
Notes Payable
Section 26.2
Notes Payable
What Are
Long-Term Liabilities?
long-term liabilities
Debts that are not required to be paid within the
next accounting period.
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Interest-Bearing
Notes Payable
Section 26.2
Notes Payable
Interest-Bearing
Note Payable
Two Types of
Notes Issued by
Businesses
Non-Interest-Bearing
Note Payable
interest-bearing note payable
A note that requires the face value plus interest to be paid on the
maturity date.
non-interest-bearing note payable
A note from which the interest is deducted in advance from the face value of
the note; no interest rate is stated on the note.
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Interest-Bearing
Notes Payable
Section 26.2
Notes Payable
Recording the Issuance of an
Interest-Bearing Note Payable
Business Transaction
On April 3 The
Starting Line
borrowed $7,000
from State Street
Bank and issued
a 90-day, 12%
note payable to the
bank, Note 6.
See pages 760–761
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Interest-Bearing
Notes Payable
Section 26.2
Notes Payable
Recording the Payment of an
Interest-Bearing Note Payable
Business Transaction
On July 2 The Starting Line issued Check 3892 for $7,207.12 payable to
State Street Bank in payment of the note payable issued April 3.
See page 761
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Non-Interest-Bearing
Notes Payable
Section 26.2
Notes Payable
What Is a
Bank Discount?
bank discount
The interest charge deducted in advance on a
non-interest-bearing note payable.
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Non-Interest-Bearing
Notes Payable
Section 26.2
Notes Payable
What Are
Proceeds?
proceeds
The cash actually received by the borrower on a
non-interest-bearing note payable.
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Non-Interest-Bearing
Notes Payable
Section 26.2
Notes Payable
See page 763
A non-interest-bearing note payable has no
interest rate stated on the note.
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Non-Interest-Bearing
Notes Payable
Section 26.2
Notes Payable
Calculating Non-Interest-Bearing Notes Payable
Face Value x Discount Rate x Time = Bank Discount
$1,500 x
0.12
x 90/365 =
$ 44.38
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Non-Interest-Bearing
Notes Payable
Section 26.2
Notes Payable
Recording the Issuance of a
Non-Interest-Bearing Note Payable
Business Transaction
On June 12 The Starting Line signed a $1,500, 90-day non-interest-bearing
note payable that First Federal Bank discounted at a rate of 12%, Note 13.
See page 763–764
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Non-Interest-Bearing
Notes Payable
Section 26.2
Notes Payable
Recording the Issuance of a
Non-Interest-Bearing Note Payable
Business Transaction
On June 12 The Starting Line signed a $1,500, 90-day non-interest-bearing
note payable that First Federal Bank discounted at a rate of 12%, Note 13.
See page 763–764
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Non-Interest-Bearing
Notes Payable
Section 26.2
Notes Payable
The Interest Expense
account is classified as an
other expense.
other expense
A nonoperating expense; an expense that does not
result from the normal operations of the business.
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Non-Interest-Bearing
Notes Payable
Section 26.2
Notes Payable
See page 766
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Section 26.3
Notes Receivable
Key Term
other revenue
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Recording the Receipt
of a Note Receivable
Section 26.3
Notes Receivable
Notes
Receivable
Interest
Income
An asset account, and its normal
balance is a debit.
An other revenue account
other revenue
Nonoperating revenue that a business receives
from activities other than its normal operation.
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Recording the Receipt
of a Note Receivable
Section 26.3
Notes Receivable
Business Transaction
On March 1 The Starting Line sold $1,750 of merchandise on account to Joe Dimaio.
That transaction was recorded in The Starting Line’s sales journal. Joe cannot pay his
account by the due date. On April 8 The Starting Line received a 60-day, 12.5% note
dated April 6 for $1,750 from Joe Dimaio to settle the account receivable, Note 4.
See page 768–769
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Recording the Receipt
of a Note Receivable
Section 26.3
Notes Receivable
Business Transaction
On March 1 The Starting Line sold $1,750 of merchandise on account to Joe Dimaio.
That transaction was recorded in The Starting Line’s sales journal. Joe cannot pay his
account by the due date. On April 8 The Starting Line received a 60-day, 12.5% note
dated April 6 for $1,750 from Joe Dimaio to settle the account receivable, Note 4.
See page 768–769
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Recording the Payment
of a Note Receivable
Section 26.3
Notes Receivable
Business Transaction
On June 7 The Starting Line received a check dated June 5 for $1,785.96
from Joe Dimaio in payment of the $1,750 note of April 6 plus interest of
$35.96, Receipt 996.
See page 769
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Question 1
Calculate the interest for the following:
Use the formula: Principal X Interest Rate = Time
$
75.00 *
163.56
94.50 **
2,310.00
49.73
* $2,500.00 X .12 X 3/12
** Annual Interest = $31.50 X 3 years
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Question 2
Why is interest received from customers considered “other revenue”?
This is revenue from activities other than the normal operations
of the business. If a company is not in the business of lending
money, the revenue from this transaction is considered
nonoperating revenue.
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