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Chapter
16
Notes Payable and Notes
Receivable
Section 1: Accounting for
Notes Payable
Section Objectives
16-1 Determine whether an instrument meets all the
requirements of negotiability.
16-2 Calculate the interest on a note.
16-3 Determine the maturity date of a note.
16-4 Record routine notes payable transactions.
16-5 Record discounted notes payable transactions.
Determine whether an instrument meets
Objective 16-1 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
Objective 16-2
Calculate the interest on a note.
QUESTION:
What is interest?
ANSWER:
Interest is the fee charged for the
use of money.
16-4
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
16-5
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.
16-6
Record routine notes payable
Objective 16-4
transactions.
Notes Payable Transactions
Record the issuance of a note payable
2016
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
16-7
Notes Payable Transactions
Record payment of the note payable and interest:
Interest rate is 8%, term of note is 90 days.
2016
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
16-8
Objective 16-5 Record discounted notes payable
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
16-9
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.
16-10
Chapter
16
Notes Payable and Notes
Receivable
Section 2: Accounting for
Notes Receivable
Section Objectives
16-6 Record routine notes receivable transactions.
16-7 Compute the proceeds from a discounted note receivable,
and record transactions related to discounting of notes
receivable.
16-8 Understand how to use bank drafts and trade acceptances
and how to record transactions related to those
instruments.
16-11
Record routine notes receivable
Objective 16-6
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.
16-12
Notes Receivable Transactions
Record the receipt of cash from a customer in
payment of their note:
2016
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
16-13
Note Receivable
Not Collected at Maturity
If a note is not paid and not renewed, it is
dishonored.
2016
Aug 11
Accounts Rec./John Woods
Notes Receivable
Interest Income
To charge back Woods’s
dishonored note plus
interest to maturity
1,220.00
1,200.00
20.00
Interest income is recognized and added to
the account receivable
16-14
Objective 16-7
Compute the proceeds from a
discounted note receivable, and
record transactions related to
discounting of notes receivable.
Discounting a Note Receivable
If the noteholder wants cash before the
maturity date, the note can be discounted
(sold) at the bank.
16-15
Discounting a Note Receivable
The bank pays the proceeds to the noteholder.
Principal
+ Interest
– Discount
(Maturity Value)
= Proceeds
16-16
Contingent Liability for a
Discounted Note
QUESTION:
What is a contingent liability?
ANSWER:
A contingent liability is an item that
can become a liability if certain
future events happen.
16-17
Contingent Liability for a
Discounted Note

The note holder endorses the discounted note
receivable.

If the maker of the note dishonors the note, the
bank can obtain payment from the endorser.

The endorser has a contingent liability.
16-18
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.
16-19
Objective 16-8
Understand how to use bank
drafts and trade acceptances
and how to record transactions
related to those instruments.
16-20
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.
16-21
Trade Acceptance: a draft used in recording
transactions involving the sale of goods
Original transaction
Recorded as a sale on
credit
Trade acceptance
Accounted for as a
promissory note
16-22
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.
16-23
Thank You
for using
College Accounting, 14th Edition
Price • Haddock • Farina
16-24