Unit 5 Accounting for Special Procedures Chapter 22 Cash Funds Chapter 23 Plant Assets and Depreciation Chapter 24 Uncollectible Accounts Receivable Chapter 25 Inventories Chapter 26 Notes Payable and Receivable Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 26 Notes Payable and Receivable What You’ll Learn Explain how businesses use promissory notes. Calculate and record notes payable and notes receivable. Explain the difference between interest-bearing and non-interest-bearing notes. Journalize transactions involving notes payable. Journalize transactions involving notes receivable. Define the accounting terms introduced in this chapter. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 26, Section 1 Promissory Notes What Do You Think? What does the term interest mean? Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Promissory Notes Main Idea You Will Learn SECTION 26.1 Main Idea The formula for calculating interest is principal x interest rate x time. You Will Learn how promissory notes are used. how to calculate the interest on a note. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Promissory Notes Key Terms promissory note note payable SECTION 26.1 Key Terms promissory note note payable note receivable principal face value term issue date payee interest rate maturity date maker Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Promissory Notes Key Terms interest maturity value SECTION 26.1 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Promissory Notes A Promise to Pay SECTION 26.1 A Promise to Pay A promissory note is a written promise to pay a certain amount of money at a specific time. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Promissory Notes Notes Payable and Notes Receivable SECTION 26.1 Notes Payable and Notes Receivable A note payable is a promissory note that a business issues to a creditor when it borrows or buys on credit. A note receivable is a promissory note that a business accepts from a credit customer. The parts of a promissory note are: Principal or face value Term Issue date Payee Interest rate Maturity date Maker Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Promissory Notes SECTION 26.1 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Promissory Notes The Maturity Date of a Note SECTION 26.1 The Maturity Date of a Note The period of time in which a note’s maker agrees to repay the note is the term of the note. The term and the issue date are needed to determine the maturity date. To calculate 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). Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Promissory Notes The Maturity Date of a Note SECTION 26.1 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Promissory Notes Calculation of Interest on a Note SECTION 26.1 Calculation of Interest on a Note Interest is the fee charged for the use of money. The interest rate is the interest stated as a percentage of the principal. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Promissory Notes Calculating Interest Using a Formula SECTION 26.1 Calculating Interest Using a Formula Use the following formula to calculate interest: Interest = Principal x Interest Rate x Time Interest rates are usually stated on an annual basis. If the term is less than a year, the time in the calculation is expressed as a fraction of a year. Maturity value is the amount due at the due date. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Promissory Notes Calculating Interest Using an Interest Table SECTION 26.1 Calculating Interest Using an Interest Table To calculate interest using an interest table, follow these steps: 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. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Promissory Notes Calculating Interest Using an Interest Table SECTION 26.1 Calculating Interest Using an Interest Table Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Promissory Notes Key Terms Review promissory note SECTION 26.1 Key Terms Review promissory note A written promise to pay a certain amount of money at a specific time. note payable A promissory note issued to a creditor. note receivable A promissory note that a business accepts from a customer. principal The amount of money borrowed on a promissory note. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Promissory Notes Key Terms Review face value SECTION 26.1 Key Terms Review face value The amount written on the face of a promissory note; also called principal. term The length of time the borrower has to repay a promissory note. issue date The date on which a promissory note is written. payee The person or business to whom a check is written or a note is payable. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Promissory Notes Key Terms Review interest rate SECTION 26.1 Key Terms Review interest rate The fee charged for the use of money stated as a percentage of the principal. maturity date The due date of a promissory note; the date on which the principal and interest must be paid. maker The person or business promising to repay the principal and interest when a loan is made. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Promissory Notes Key Terms Review interest SECTION 26.1 Key Terms Review interest The fee charged for the use of money. maturity value The principal plus interest that must be paid on a promissory note’s due date. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 26, Section 2 Notes Payable and Receivable What Do You Think? What do the terms interest-bearing and non-interest-bearing mean? Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable Main Idea You Will Learn SECTION 26.2 Main Idea Businesses issue and accept two types of notes: interest-bearing notes and non-interest-bearing notes. You Will Learn what an interest-bearing promissory note is. why a “non-interest-bearing” note does have interest expense. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable Key Terms long-term liabilities SECTION 26.2 Key Terms long-term liabilities interest-bearing note payable non-interest-bearing note payable bank discount proceeds other expense Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable Interest-Bearing Notes Payable SECTION 26.2 Interest-Bearing Notes Payable Notes issued by a business are recorded in Notes Payable, a liability account. Long-term liabilities are debts that become due after one year. An interest-bearing note payable requires the principle plus interest to be paid on the maturity date. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable SECTION 26.2 Recording the Issuance of an Interest-Bearing Note Payable Here is an example of how to record an interest-bearing note payable. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable SECTION 26.2 Recording the Issuance of an Interest-Bearing Note Payable Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable SECTION 26.2 Recording the Issuance of an Interest-Bearing Note Payable Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable SECTION 26.2 Recording the Issuance of an Interest-Bearing Note Payable Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable SECTION 26.2 Recording the Payment of an Interest-Bearing Note Payable Here is an example of how to record the payment of an interest-bearing note payable. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable SECTION 26.2 Recording the Payment of an Interest-Bearing Note Payable Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable SECTION 26.2 Recording the Payment of an Interest-Bearing Note Payable Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable SECTION 26.2 Recording the Payment of an Interest-Bearing Note Payable Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable Non-Interest-Bearing Notes Payable SECTION 26.2 Non-Interest-Bearing Notes Payable A non-interest bearing note payable is a note in which the interest is deducted from the face value of the note when it is issued. It is called non-interest bearing because no interest rate is stated on the note. The interest deducted in advance is the bank discount. The cash received by the borrower is called the proceeds. For this type of note, the maturity value is the same as the face value. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable Calculating Non-Interest-Bearing Notes Payable SECTION 26.2 Calculating Non-Interest-Bearing Notes Payable The proceeds for this non-interest-bearing note, discounted at 12%, are $1,455.62 (1,500.00-44.38). Face Value x Discount Rate x Time = Bank Discount $1,500 x 0.12 x 90/365 = $ 44.38 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable SECTION 26.2 Recording the Issuance of a Non-Interest-Bearing Note Payable The bank discount is recorded in a contra liability account called Discount on Notes Payable. The normal balance of Discount on Notes Payable is a debit. This transaction records the issuance of the non-interest-bearing note. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable SECTION 26.2 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable SECTION 26.2 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable SECTION 26.2 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable SECTION 26.2 Recording the Payment of a Non-Interest-Bearing Note Payable When a non-interest-bearing note payable matures, the amount of the bank discount is recorded as an expense. Record a matured note using two separate journal entries or a compound entry: the payment of the non-interest-bearing note payable, and the interest expense The Interest Expense account is classified as an other expense, which is nonoperating expense. It appears on the income statement below operating income. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable Key Terms Review long-term liabilities SECTION 26.2 Key Terms Review long-term liabilities Debts that are not required to be paid within the next accounting period. 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. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Payable Key Terms Review bank discount SECTION 26.2 Key Terms Review bank discount The interest charge deducted in advance on a non-interest-bearing note payable. proceeds The cash actually received by the borrower on a non-interest-bearing note payable. other expense A nonoperating expense; an expense that does not result from the normal operations of the business. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 26, Section 3 Notes Payable and Receivable What Do You Think? Why should a business record a note receivable that it accepted? Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Receivable Main Idea You Will Learn SECTION 26.3 Main Idea Businesses record the receipt of a note receivable as well as the payment of the note. You Will Learn how to record a note receivable. how to record the payment of a note receivable. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Receivable Key Term other revenue SECTION 26.3 Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Receivable Recording the Receipt of a Note Receivable SECTION 26.3 Recording the Receipt of a Note Receivable If a customer needs additional time to pay an account receivable, he or she might sign a promissory note, called a note receivable. The interest earned on a note receivable is recorded in the Interest Income account, an other revenue account. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Receivable Recording the Receipt of a Note Receivable SECTION 26.3 Recording the Receipt of a Note Receivable To record the receipt of a note receivable, follow this example. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Receivable Recording the Receipt of a Note Receivable SECTION 26.3 Recording the Receipt of a Note Receivable Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Receivable Recording the Receipt of a Note Receivable SECTION 26.3 Recording the Receipt of a Note Receivable Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Receivable Recording the Receipt of a Note Receivable SECTION 26.3 Recording the Receipt of a Note Receivable Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Receivable Recording the Payment of a Note Receivable SECTION 26.3 Recording the Payment of a Note Receivable To record a payment of a note receivable follow this example. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Notes Receivable Key Term Review other revenue SECTION 26.3 Key Term Review other revenue Nonoperating revenue that a business receives from activities other than its normal operation. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 26 Review Question 1 Calculate the interest for the following: Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 26 Review CHAPTER 26 Answer 1 Use the formula: Principal  Interest Rate  Time * $2,500.00  .12  3/12 ** Annual Interest = $31.50  3 years Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 26 Review Question 2 Why is interest received from customers considered “other revenue”? Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 26 Review CHAPTER 26 Answer 2 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. Glencoe Accounting Unit 5 Chapter 26 Copyright © by The McGraw-Hill Companies, Inc. All rights reserved.

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