NOTES
Students must understand the concepts about promissory notes that are listed below to
be able to apply the procedures to prepare journal entries related to notes payable and
notes receivable.

A promissory note is a written and signed promise to pay a sum of money on a
specific date.

Promissory notes are used when a business borrows money from a bank or other
lending agency for a period of time. These are called Notes Payable.

Businesses may request a note from a customer who wants credit beyond the
usual time given for sales on account. These are called Notes Receivable.

Notes can be useful in a court of law as written evidence of a debt.

The time of a note issued for less than one year is usually stated in days. The
time used in calculating interest is usually stated as a fraction of 360 days.

The time between the date a note is signed and the date a note is due (maturity
date) is typically expressed in days. The maturity date is calculated by counting
the exact number of days. The date on which the note is written is not counted,
but the maturity date is counted.

Students may have difficulty knowing or remembering the number of days in each
month. Teachers may teach students the nursery rhyme (Thirty Days Hath
September) or the knuckles and valleys method to determine the number of days
in each month. These ideas can be found by following these links:
http://www.jetcityorange.com/days-of-the-month/ (includes a You-Tube video)
http://www.eudesign.com/mnems/dayspcm.htm
http://www.instructables.com/id/Easy-way-to-remember-the-days-in-each-month/
6311 Accounting I
Summer 2010, Version 2
Page 379
UNPACKED CONTENT
I.
Calculating Interest, Maturity Date, and Maturity Value on a Note
A. Interest = Principal X Interest Rate X Time in Years
B. Maturity Date
Example: 90-day Note, signed May 18, Maturity Date is August 16
1. Calculate the number of days remaining in May (13) by subtracting the date
of the note (18) from the number of days in May (31): 31 – 18 = 13.
2. Calculate the number of days remaining in the term of the note (77) by
subtracting the number of days in the previous month (13) from the term of
the note (90). Because 77 is greater than the number of days in June (30),
add all of the days in June (30).
3. Calculate the number of days remaining in the term of the note (47) by
subtracting the number of days in the previous months, 43 (13+30), from
the term of the note, 90. Because 43 is greater than the number of days in
July (31), add all of the days in July (31).
4. Calculate the number of days remaining in the term of the note (16) by
subtracting the number of days in the previous months, 74 (13+30+31),
from the term of the note, 90: 90 – 74 = 16. Because 16 is less than the
number of days in August (31), add only 16 days in August. The Maturity
Date is August 16.
C. Maturity Value = Principal + Interest
II.
Procedures for Journalizing Notes Payable Transactions
A. Issuance of a note payable
1. Write the date in the Date column of the Cash Receipts Journal.
2. Write the receipt number in the Doc. No. column.
3. Debit Cash for the principal amount of the note.
4. Credit Notes Payable for the principal amount of the note.
B. Payment of principal and interest on a note payable
1. Write the date in the Date column of the Cash Payments Journal.
2. Write the check number in the Doc. No. column.
3. Debit Notes Payable for the principal amount of the note.
4. Debit Interest Expense for the amount of the interest paid.
5. Credit Cash for the total amount paid (maturity value of the note).
C. A note payable issued for an extension of time
1. Write the date in the Date column of the General Journal.
2. Debit Accounts Payable (referencing the appropriate vendor account) for
the principal amount of the note.
3. Credit Notes Payable for the principal amount of the note.
D. Payment on a note payable for an extension of time
1. Write the date in the Date column of the Cash Payments Journal.
2. Write the check number in the Doc. No. column.
3. Debit Notes Payable for the principal amount of the note.
4. Debit Interest Expense for the interest paid.
5. Credit Cash for the total amount paid.
6311 Accounting I
Summer 2010, Version 2
Page 380
III.
Procedures for Journalizing Notes Receivable Transactions
A. Acceptance of a note receivable from a customer
1. Write the date in the Date column of the General Journal.
2. Write the note number in the Doc. No. column.
3. Debit Notes Receivable for the principal amount of the note.
4. Credit Accounts Receivable (referencing the appropriate customer) for the
principal amount of the note.
B. Collection of principal and interest on a note receivable
1. Write the date in the Date column of the Cash Receipts Journal.
2. Write the receipt number in the Doc. No. column.
3. Debit Cash for the total amount received (maturity value of the note
receivable).
4. Credit Interest Income for the amount of the interest received.
5. Credit Notes Receivable for the principal amount of the note.
C. A dishonored note receivable
1. Write the date in the Date column of the General Journal.
2. Debit Accounts Receivable (referencing the appropriate customer account)
for the total amount of the note, including interest due.
3. Credit Notes Receivable for the principal amount of the note.
4. Credit Interest Income for the interest due on the note.
KEY TERMS











Promissory note
Creditor
Note payable
Principal (face value
Term (time
Issue date
Payee
Maturity date
Maker
Maturity value
Current liabilities
6311 Accounting I









Summer 2010, Version 2
Long-term liabilities
Interest-bearing note
Non-interest-bearing note
Bank discount
Proceeds
Interest Expense
Note receivable
Interest income
Dishonored note
Page 381
5.01 Calculating Interest, Maturity Date, and Maturity Value
Fill in the blanks with the correct information.
Calculating Interest
The amount paid for the use of money for a period of time is called
X
Example: $20,000.00 X 6% X 1 = $
X
.
= Interest for One Year
X
X
Example: $20,000.00 X 6% X 90/360 =
= Interest for Fraction of Year
Calculating Maturity Date
The maturity date is calculated by counting the
. The
date on which the note is
is not counted, but the
date is counted.
Example: Date of 90-day Note – May 18th
May 18-May 31
=
13 days
June
=
30 days
July
=
31 days
August 1-August 16
=
16 days
Total
=
90 days
Calculating Maturity Value
The amount that is due on the maturity date of a note is called the
.
+
=
Example: $20,000.00 + $300.00 = $
6311 Accounting I
Summer 2010, Version 2
Page 382
5.01 Calculating Interest, Maturity Date, and Maturity Value –
Calculating Interest
The amount paid for the use of money for a period of time is called interest.
Principal X Interest Rate X Time in Years = Interest for One Year
Example: $20,000.00 X 6% X 1 = $1,200.00
Principal X Interest Rate X Time as Fraction of Year = Interest for Fraction of Year
Example: $20,000.00 X 6% X 90/360 = $300.00
Calculating Maturity Date
The maturity date is calculated by counting the exact number of days.
The date on which the note is written is not counted, but the maturity date
is counted.
Example: Date of 90-day Note – May 18th
May 18-May 31
=
13 days
June
=
30 days
July
=
31 days
August 1-August 16
=
16 days
Total
=
90 days
Calculating Maturity Value
The amount that is due on the maturity date of a note is called the maturity
value.
Principal + Interest = Maturity Value
Example: $20,000.00 + $300.00 = $20,300.00
6311 Accounting I
Summer 2010, Version 2
Page 383
5.01 Journalizing Notes Payable and Notes Receivable
Transactions
Fill in the accounts to complete the entries.
1. Journalizing the Issuance of a Note Payable
Debit
Credit
2. Journalizing the Payment of Principal and Interest on a Note Payable
Debit
Debit
Credit
3. Journalizing a Note Payable for an Extension of Time
Debit
Credit
4. Journalizing Payment on a Note Payable for an Extension of Time
Debit
Debit
Credit
5. Journalizing the Acceptance of a Note Receivable from a Customer
Debit
Credit
6. Journalizing the Collection of Principal and Interest on a Note Receivable
Debit
Credit
Credit
7. Journalizing a Dishonored Note Receivable
Debit
Credit
Credit
6311 Accounting I
Summer 2010, Version 2
Page 384
5.01 Journalizing Notes Payable and Notes Receivable
Transactions
Fill in the accounts to complete the entries.
1. Journalizing the Issuance of a Note Payable
Debit Cash
Credit Notes Payable
2. Journalizing the Payment of Principal and Interest on a Note Payable
Debit Notes Payable
Debit Interest Expense
Credit Cash
3. Journalizing a Note Payable for an Extension of Time
Debit Accounts Payable (using the appropriate vendor account)
Credit Notes Payable
4. Journalizing Payment on a Note Payable for an Extension of Time
Debit Notes Payable
Debit Interest Expense
Credit Cash
5. Journalizing the Acceptance of a Note Receivable from a Customer
Debit Notes Receivable
Credit Accounts Receivable (referencing the appropriate customer)
6. Journalizing the Collection of Principal and Interest on a Note Receivable
Debit Cash
Credit Notes Receivable
Credit Interest Income
7. Journalizing a Dishonored Note Receivable
Debit Accounts Receivable (referencing the appropriate customer)
Credit Notes Receivable
Credit Interest Income
6311 Accounting I
Summer 2010, Version 2
Page 385
5.01 KEY TERMS – BLANK
Notes Payable and Notes Receivable
TERM
DEFINITION
Promissory note
Creditor
Note payable
Principal (face value)
Term (time)
Issue date
Payee
Interest rate
Maturity date
Maker
Maturity value
Current liabilities
Long-term liabilities
Interest-bearing note
Non-interest-bearing note
Bank discount
Proceeds
Interest Expense
Note receivable
Interest income
Dishonored note
6311 Accounting I
Summer 2010, Version 2
Page 386
5.01 KEY TERMS
Notes Payable and Notes Receivable
TERM
Promissory note
Creditor
Note payable
Principal (face value)
Term (time)
Issue date
Payee
Interest rate
Maturity date
Maker
Maturity value
Current liabilities
Long-term liabilities
Interest-bearing note
Non-interest-bearing note
Bank discount
Proceeds
Interest Expense
Note receivable
Interest income
Dishonored note
6311 Accounting I
DEFINITION
A written promise to pay a certain amount of money at
a specific time
A person or organization to whom a liability is owed
A promissory note that a business issues to a creditor
when it borrows or buys on credit
Amount being borrowed
Amount of time ( stated in days, months, or years) the
borrower has to repay the note
Date on which the note is written and signed
The person or business to whom the amount of a note
is payable
Fee charged for use of money; a percentage of the
principal
Date a note is due
The person or business borrowing money by note and
promising to repay the principal and interest
The amount due at the due date
Liabilities due within a short time, usually within a
year
Liabilities that are due after one year
A note that requires payment of the principal plus
interest on the maturity date
A note that requires the interest to be paid in advance;
interest is deducted from the face value of the note
Interest on a note that is deducted in advance
The cash received by the borrower; equals face value
less any bank discount
General ledger account used to record interest paid on
a note; classified as an Other Expense
Promissory note that a business accepts from a
customer
Interest earned on a note receivable; general ledger
account classified as Other Income
A note that is not paid when due
Summer 2010, Version 2
Page 387
5.01 Prototype Assessment Items
These prototype assessment items illustrate the types of items used in the item bank for
this objective. All items have been written to match the cognitive process of the apply
verb in the objectives. These exact questions will not be used on the secure
postassessment, but questions in similar formats will be used.
Calculate Interest, Maturity Date, and Maturity Value
Scenario 1
Paul's Playscapes signed a $30,000, 60-day note at 5% on May 1, 2010. Paul's
Playscapes uses a 360-day year.
1.
Using the information given in Scenario 1, what is the total amount of interest to be
paid on this note?
A.
B.
C.
D.
$200.00
$250.00
$1,500.00
$2,500.00
Using the information given in Scenario 1, what is the maturity date of the note
payable?
A.
B.
C.
D.
2.
May 30, 2010
May 31, 2010
June 29, 2010
June 30, 2010
Sandy’s Cafe signed a $20,000, 90-day, 10%, interest-bearing note on June 1,
2010. Using a 360-day year, what is the maturity value of the note?
A.
B.
C.
D.
$20,050.00
$20,200.00
$20,500.00
$22,000.00
Journalize the Issuance of a Note Payable
3.
Adams Company signed a 90-day, 10%, interest-bearing note for $12,000.00 with
First National Bank. What is the journal entry for the issuance of the note payable?
A.
B.
C.
D.
Debit Cash $12,300.00; Credit Note Payable $12,300.00
Debit Cash $12,000.00; Credit Note Payable $12,000.00
Debit Note Payable $12,300.00; Credit Cash $12,300.00
Debit Note Payable $12,000.00; Credit Cash $12,000.00
6311 Accounting I
Summer 2010, Version 2
Page 388
Journalize the Payment of Principal and Interest of a Note Payable
4.
Donna's Dress Store paid First Street Bank in full for a 90-day, 10%, interestbearing note for $6,000. Using a 360-day year, what is the journal entry for Donna's
Dress Store to record the payment of the note payable?
A.
B.
Debit Cash $6,150.00; Credit Note Payable $6,150.00
Debit Cash $6,150.00; Credit Note Payable $5,000.00; Credit Interest Expense
$150.00
C. Debit Note Payable $6,150.00; Credit Interest Expense $150.00; Credit Cash
$5,000.00
D. Debit Note Payable $6,000.00; Debit Interest Expense $150.00; Credit Cash
$6,150.00
Journalizing a Note Payable for an Extension of Time
5.
The Shoe Shop signed a 120-day, 10% note to Sam's Sandals for an extension of
time on its account payable in the amount of $3,000.00. What is the correct entry
for the Shoe Shop to record the note payable for an extension of time?
A.
Debit Accounts Payable/Sam's Sandals $3,000.00; Credit Notes Payable
$3,000.00
B. Debit Accounts Payable/Sam's Sandals $3,100.00; Credit Notes Payable
$3,100.00
C. Debit Notes Payable $3,000.00; Credit Accounts Payable/Sam's Sandals
$3,000.00
D. Debit Notes Payable $3,100.00; Credit Accounts Payable/Sam's Sandals
$3,100.00
Journalizing Payment on a Note Payable for an Extension of Time
6.
Martin Food Distributors granted an extension of time for the account payable of
Good Food Store for a 90-day, 8%, $12,000 note. Using a 360-day year, what is
the journal entry for Good Food Store to record the payment of the note payable?
A.
B.
Debit Cash $12,000.00; Credit Note Payable $12,000.00
Debit Cash $12,240.00; Credit Note Payable $12,000.00; Credit Interest
Expense $240.00
C. Debit Note Payable $12,000.00; Debit Interest Expense $240.00; Credit Cash
$12,240.00
D. Debit Note Payable $12,240.00; Credit Interest Expense $240.00; Credit Cash
$12,000.00
6311 Accounting I
Summer 2010, Version 2
Page 389
Journalizing the Acceptance of a Note Receivable from a Customer
7.
Adam Smith has an overdue account in the amount of $587.25 with Jeans
Warehouse. Jeans Warehouse agrees to accept a note receivable from Adam.
What is the journal entry to record the acceptance of the note receivable?
A.
B.
Debit Accounts Receivable/Adam Smith $587.25; Credit Cash $587.25
Debit Accounts Receivable/Adam Smith $587.25; Credit Notes Receivable
$587.25
C. Debit Cash $587.25; Credit Accounts Receivable/Adam Smith $587.25
D. Debit Notes Receivable $587.25; Credit Accounts Receivable/Adam Smith
$587.25
Journalizing the Payment of a Note Receivable by a Customer
8.
Tennis Warehouse received a payment of a note receivable in the amount of
$575.50. Interest on the note receivable was $47.50. What is the journal entry to
record the payment of the note receivable?
A.
B.
Debit Accounts Receivable $575.50; Credit Cash $575.50
Debit Cash $528.00; Debit Interest Expense $47.50; Credit Accounts
Receivable $575.50
C. Debit Cash $575.50; Credit Accounts Receivable $575.50
D. Debit Cash $575.50; Credit Interest Income $47.50; Credit Notes Receivable
$528.00
Journalizing a Dishonored Note Receivable
9.
Marcy Johnson dishonored a 180-day, 8% note for $4,000.00. What is the journal
entry to record the dishonored note receivable?
A.
Debit Accounts Receivable/Marcy Johnson $4,000.00; Credit Notes
Receivable $4,000.00
B. Debit Accounts Receivable/Marcy Johnson $4,160.00; Credit Interest Income
$160.00; Credit Notes Receivable $4,000.00
C. Debit Notes Receivable $4,160.00; Credit Accounts Receivable/Marcy
Johnson $4,160.00
D. Debit Notes Receivable $4,160.00; Debit Interest Expense $160.00; Credit
Accounts Receivable/Marcy Johnson $4,000.00
6311 Accounting I
Summer 2010, Version 2
Page 390