NOTES RECIEVABLE
Read text ref. chapt. 9 p.434 - 438,
demonstration problem p. 437
• “A promissory note is an unconditional
promise in writing (a legally binding
agreement) to pay on demand or at a
future date a definite sum of money.”
 WHY A NOTE?
MAKER: promises to pay; entity that borrows
the money
PAYEE: entity that lends the money
Notes Recievable Chapt. 9, p. 434
1
INTEREST
• Notes bare interest; the payee expects to receive the
face value of the note receivable and also an interest
payment.
 Why do notes also have interest payments
I  Pr t
 P = face value or principle of the note
 r = interest rate per year (p/a)
 t = time  fraction of a year
 I = interest
Notes Recievable Chapt. 9, p. 434
2
NOTES
• Notes Receivable have a maturity
date, the date that payment on the
note is due. All notes other than
those payable on demand, are legally
due 3 days after the maturity date
“three days of grace”. However,
interest is still charged on the three
days of grace.
Notes Recievable Chapt. 9, p. 434
3
RECOGNIZING NOTES RECEIVABLE
Wilma Company receives a $1,000, 6% promissory
note, due in two months (July 31) from Brent
Company to settle an open account.
GENERAL JOURNAL
Date
Account Titles and Explanation
May 1 Notes Receivable
Accounts Receivable — Brent Company
To record acceptance of Brent
Company note.
Notes Recievable Chapt. 9, p. 434
Debit
Credit
1,000
1,000
4
Example: Jim-Bob Inc., unable to pay his
$100,000 AP to Slim Co., negotiates
prolonged payment as a Note
 journalize it!
Note Receivable (Jim-Bob Inc.) $100,000
AR (Jim-Bob Inc.)
$100,000
Acceptance of a note $100,000, 9.5% p/a from Jim-Bob Inc.
Why would Slim Co. accept a note instead of
demanding the AR from Jim-Bob?
Notes Recievable Chapt. 9, p. 434
5
HONOUR OF NOTES RECEIVABLE
• A note is honoured when it is paid in full at its maturity date.
• Wolder Co. lends Higly Inc. $10,000 on June 1, accepting a
4.5% interest-bearing note, due in 4 months, on September 30.
• Wolder collects the maturity value of the note from Higley on
September 30.
GENERAL JOURNAL
Date
Account Title and Explanation
Sept. 30 Cash
Notes Receivable - Higly
Interest Revenue
To record collection of Higly note.
Notes Recievable Chapt. 9, p. 434
Debit
Credit
10,150
10,000
150
6
Example: An “honoured Note” - A 90 day
$100,000 note receivable from Jim-Bob Inc. is due
August 30th. The interest rate is 9.5% pa. The
note was for settlement of a $100,000 A/R from
Jim-Bob. Full payment is received Sept. 2.
journalize receipt of payment
Cash
102,420.55
Note Receivable (Jim-Bob Inc.) 100,000
Interest Revenue
2420.55
To record payment of $100,000, 9.5% note
Notes Recievable Chapt. 9, p. 434
7
DISHONOUR (DEFAULT) OF NOTES
• A dishonoured note is a note that is not paid in full at
maturity.
• A dishonoured note receivable is no longer negotiable.
• Since the payee still has a claim against the maker
of
the note, the balance in Notes Receivable is
usually transferred to Accounts Receivable.
GENERAL JOURNAL
Date
Account Title and Explanation
Sept. 30 Accounts Receivable - Higly
Notes Receivable - Higly
Interest Revenue
To record the dishonour of Higly note.
Notes Recievable Chapt. 9, p. 434
Debit
Credit
10,150
10,000
150
8
DEFAULT & RENEWAL
DEFAULT
• If the A/R (note) will
ultimately not be
collected, it will be
written off by debiting
the Allowance for
Doubtful Accounts and
no interest would be
recorded.
RENEWAL OF A NOTE:
• The maker and the payee
of a note may agree that
the note shall be renewed
rather than paid at the
maturity date. In this
situation the old note
should be canceled and
a new note written.
Notes Recievable Chapt. 9, p. 434
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