Notes Receivable
and Notes Payable
Chapter 15
15 - 1
Learning Objective 1
Determining interest calculations
and maturity dates on notes.
15 - 2
Learning Unit 15-1
What are promissory notes?
 They are a written promise to pay a certain
sum of money to a lender at a fixed future
date.
 The payee is the lender.
 The maker is the borrower.
15 - 3
Learning Unit 15-1
$20,000.00
Oct. 2, 20xx
We, Green Company, promise to pay
NATIONAL BANK
TWENTY-THOUSAND AND 00/100…DOLLARS
ON DECEMBER 1, 200x
Date of issue
Plus interest at the annual rate of 12 percent.
__________
Principal
Payee
Maker
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Learning Unit 15-1
Principal is the amount borrowed.
 Maturity date is the date the money is to be
repaid.
 The interest rate is the yearly interest rate.
 The interest is adjusted to the length of time
for short term notes.
 The obligation is called a note payable.

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Learning Unit 15-1
Interest = Principal × Rate × Time
 What is the interest on the note due to
National Bank?
 Principal:
$20,000
Interest:
12%
Time:
October 2, 200x to
December 1, 200x
 $20,000 × 12% × 60 ÷ 360 = $400

15 - 6
Learning Unit 15-1
Determining maturity date:
 The exact number of days in each month
must be used.
 The date the note was issued is omitted.
 Add the days remaining until the total time
on the note is reached.
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Learning Objective 2
Journalizing entries to record
renewal of a note, dishonoring
of a note, eventual receipt of
payment, and note given in
exchange for equipment purchased.
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Learning Unit 15-2
What is the entry to record a note receivable?
Notes Receivable
Sales
xxx
Notes Receivable
Accounts Receivable
xxx
xxx
xxx
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Learning Unit 15-2
What is the entry to record payments?
Cash
xxx
Notes Receivable
Interest Income
xxx
xxx
Notes Payable
Interest Expense
Cash
xxx
xxx
xxx
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Learning Unit 15-2
What is the entry to record a dishonored note?
Accounts Receivable
Interest Income
Notes Receivable
xxx
Notes Payable
xxx
Interest Expense
xxx
Accounts Payable
xxx
xxx
xxx
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Learning Objective 3
Discounting an interest-bearing
note receivable and recording
a discounted note that has
been dishonored.
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Learning Unit 15-3
Sometimes notes are exchanged for cash at
the bank (discounting).
 The number of days (up to maturity) that
the bank will hold the note is called the
discount period.
 Maturity value becomes the new principal
(of the note) used to compute bank interest
to be charged on the note.

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Learning Unit 15-3
Bank discount is the amount of interest the
bank will charge on the note.
 Cash proceeds is the amount of cash that
will be received.
 Interest is deducted on the day the note is
discounted and the money borrowed.
 That means the business uses less cash.

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Learning Unit 15-3
The bank will receive the exact maturity
value at due date.
 No interest is computed at that time.
 What are the steps?

Compute maturity value:
Interest = Principal × Rate × Time
Principal + Interest = Maturity Value
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Learning Unit 15-3
Calculate discount period:
Number of days bank holds the note
Bank discount = Maturity value
× Bank discount rate (interest rate)
× No. days bank holds note
÷ by 360.
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Learning Unit 15-3
Cash Proceeds =
Maturity Value – Bank Discount
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Learning Unit 15-3
Cash
Notes Receivable
Interest Income
xxx
Cash
Interest Expense
Notes Receivable
xxx
xxx
xxx
xxx
xxx
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Learning Unit 15-3
The bank usually requires that a note be
discounted with recourse.
 This means that if a note maker does not
pay the maturity value to the bank, the
company will have to pay the bank.
 This is called a contingent liability.

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Learning Unit 15-3

If a note is dishonored, it is charged back to
the customer using maturity value plus
penalties as the new principal amount.
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Learning Objective 4
Handling adjustments for interest
expense and interest income.
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Learning Unit 15-4
What does it mean to discount one’s own
note payable?
 This means the interest is deducted from the
amount borrowed.
 The cash proceeds to be used will be less
than the principal amount.

15 - 22
Learning Unit 15-4
At maturity, the amount that has to be
repaid is the exact face value of the note.
 The discount is a contra-account that is
written off to interest expense over the life
of the note.

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Learning Unit 15-4
Interest expense and interest income will be
computed up to the last day of the accounting
period.
 An adjusting entry will be made to recognize
interest expense as a debit and accounts
payable as a credit.
 An adjusting entry will be made to recognize
interest earned as a credit and interest
receivable as a debit.
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
End of Chapter 15
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