1. Notes Receivable and Notes Payable
Chapter 14 2

2. Determining interest calculations and maturity dates on notes.
Learning Objective 1
Determining interest calculations
and maturity dates on notes. 5

3. Learning Unit 14-1 (Promissory Notes)
What are promissory notes?
They are a written promise to
pay a certain sum of money to
a lender at a fixed future date.
Payee
Maker

4. Learning Unit 14-1 (Promissory Notes)
Principal
Date of issue
$ 20, Bennington, Vermont October 2 20XX
sixty days after date we promise to pay
to the order of Green Company
Twenty-Thousand and 00/ Dollars
Payable at National Bank
Value received 12%
No Due December 1, 20XX
Able Company
Joe Mack
Treasurer
Payee
Maturity
date
Maker

5. Learning Unit 14-1 (Promissory Notes)
Notes Payable
Principal
Maturity Date
Interest Rate 5

6. Learning Unit 14-1 (Promissory Notes)
What is the interest on a
one-year, 12%, $6,000 note?
I = P × R × T
$6,000 × 0.12 × 1 = $720

7. Learning Unit 14-1 (Promissory Notes)
What is the interest on a
60-day, 6%, $4,000 note?
I = P × R × T
$4,000 × 0.06 × 60/360 = $40

8. Learning Unit 14-1 (Promissory Notes)
How is the maturity date determined?
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. 7

9. Journalizing entries to record renewal of a note, dishonoring
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. 5

10. Learning Unit 14-2 (Recording Notes)
On August 1, 20xx, Mace Company
sold $6,000 of merchandise on
account to Jane Company.
What are the journal entries? 8

11. Learning Unit 14-2 (Recording Notes)
August 1
Accounts Receivable, Jane Co. 6,000
Sales ,000
Sold merchandise on account
Mace Company
Purchases ,000
Accounts Payable, Mace Co ,000
Purchased merchandise on account
Jane Company 8

12. Learning Unit 14-2 (Recording Notes)
On September 1, 20xx, Jane Company
gave a $6,000, 60-day, 13 percent note
to Mace Company to gain additional
time to settle the past due account.
What are the journal entries? 8

13. Learning Unit 14-2 (Recording Notes)
September 1
Notes Receivable ,000
Accounts Receivable, Jane Co. 6,000
Received 60-day, 13% note
Mace Company
Accounts Payable, Mace Co. 6,000
Notes Payable ,000
Issued 60-day, 13% note
Jane Company 8

14. Learning Unit 14-2 (Recording Notes)
On October 31, 20xx, Jane
Company pays off the note.
Mace Company
Cash ,130
Notes Receivable ,000
Interest Income
Collected Jane Company note
($6,000 × 0.13 × 60/360 = $130 interest income) 8

15. Learning Unit 14-2 (Recording Notes)
Jane Company
Notes Payable ,000
Interest Expense
Cash ,000
Paid note to Mace Company
($6,000 × 0.13 × 60/360 = $130 interest expense) 8

16. Learning Unit 14-2 (Recording Notes)
What is the entry to record a dishonored note?
Accounts Receivable xxx
Interest Income xxx
Notes Receivable xxx
Recorded note receivable dishonored
Notes Payable xxx
Interest Expense xxx
Accounts Payable xxx
Recorded note payable dishonored 8

17. Discounting an interest-bearing note receivable and recording
Learning Objective 3
Discounting an interest-bearing
note receivable and recording
a discounted note that has
been dishonored. 5

18. Learning Unit 14-3 (How to Discount Customers’ Notes)
Discounting a note
Maturity value
Discount period
Proceeds 12

19. Learning Unit 14-3 (How to Discount Customers’ Notes)
Marvin Company received an $8,000, 90-day,
12% note from Jee Company dated October 1.
On October 31, Marvin Company discounted
the note to Blue Bank, which charges
a 14% bank discount rate.

20. Learning Unit 14-3 (How to Discount Customers’ Notes)
Find the maturity value of the note:
Interest = Principal × Rate × Time
Principal + Interest = Maturity Value
Step 1
$8,000 × 0.12 × 90/360 = $240 interest
$8,000 + $240 = $8,240 maturity value

21. Learning Unit 14-3 (How to Discount Customers’ Notes)
Step 2
Calculate the discount period
(number of days bank holds the note):
90 Days Note
– 30 Days Expired before discounting
= 60 Days That bank holds note

22. Learning Unit 14-3 (How to Discount Customers’ Notes)
Step 3
Calculate the bank discount (what the
bank charges for holding the note):
Bank discount = Maturity value
× Bank discount rate
× (No. of days bank holds note ÷ 360)
$8,240 × 0.14 × 60/360 = $192.97

23. Learning Unit 14-3 (How to Discount Customers’ Notes)
Step 4
Calculate the proceeds (what Marvin
Company receives from the bank):
Cash Proceeds =
Maturity Value – Bank Discount
$8,240 – $ = $8,047.73

24. Learning Unit 14-3 (How to Discount Customers’ Notes)
Contingent Liability
If a note is dishonored, it is charged back
to the customer using maturity value plus
penalties as the new principal amount.

25. Learning Objective 4 Handling adjustments for interest expense
and interest income. 5

26. Learning Unit 14-4 (Discounting One’s Own Note)
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.

27. Learning Unit 14-4 (Discounting One’s Own Note)
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.

28. Learning Unit 14-4 (Discounting One’s Own Note)
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.

29. End of Chapter 14