LESSON 20 3 Notes Receivable Obj 5 01

LESSON 20 -3 Notes Receivable Obj. 5. 01 – Apply procedures to prepare journal entries for notes payable & notes receivable transactions Original created by M. C. Mc. Laughlin, Thomson/South-Western Modified by Deborah L. Burns, Johnston County Schools, West Johnston High School CENTURY 21 ACCOUNTING © Thomson/South-Western

2 NOTES RECEIVABLE n A customer who is unable to pay an account on the due date may request additional time n The business should require the customer to sign a note n The promissory note is a written confirmation of the debt, which provides evidence in case legal action is required to collect n Promissory notes that a business accepts from customers are called notes receivable §Notes receivable are usually paid within on year and are classified as current assets CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 20 -3

3 ACCEPTING A NOTE RECEIVABLE FROM page 598 A CUSTOMER April 14. Accepted a 90 -day, 8% note from Martin Sterling for an extension of time on his account, $3, 000. Note Receivable No. 9. 1 2 • When a customer signs a note, the principal amount is debited to an 2. Credit to Accounts Receivable asset account titled Notes Receivable • One asset is replaced by another asset 1. Debit to Notes Receivable CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 20 -3

4 COLLECTING PRINCIPAL AND INTEREST ON A NOTE RECEIVABLE n When a note receivable reaches its maturity date, the payee receives the maturity value from the maker n The interest earned on money loaned is called interest income n The interest earned on a note receivable is credited to a revenue account titled Interest Income n Interest income is investment revenue and is listed in a classification titled Other Revenue CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 20 -3

5 COLLECTING PRINCIPAL AND INTEREST page 599 ON A NOTE RECEIVABLE July 13. Received cash for the maturity value of Note Receivable No. 9, a 90 -day, 8% note: principal, $3, 000. 00, plus interest, $60. 00; total, $3, 060. 00. Receipt No. 562. 2 1 3 5 1. 2. 3. 4. Write the date. Write the account title. Write the receipt number. Write the principal amount. CENTURY 21 ACCOUNTING © Thomson/South-Western 4 6 7 5. On the next line, write the account title. 6. Calculate and write the interest income amount. 7. Write the maturity value. LESSON 20 -3

6 RECORDING A DISHONORED NOTE RECEIVABLE q. A note that is not paid when due is called a dishonored note q. The amount of the dishonored note receivable should be removed from the notes receivable account q. The amount of the note plus interest income earned on the note is still owed by the customer and should be debited to the accounts receivable account q. The dishonored note is not written off until all collection actions have been completed q. One asset account, Notes Receivable, is replaced with another asset account, Accounts Receivable CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 20 -3

7 RECORDING A DISHONORED NOTE RECEIVABLE page 600 May 6. Jill Davis dishonored Note Receivable No. 12, a 90 -day, 8% note, maturity value due today: principal, $600. 00; interest, $12. 00; total, $612. 00. Memorandum No. 92. 1 2 3 1. Debit to Accounts Receivable 2. Credit to Notes Receivable 3. Credit to Interest Income CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 20 -3

8 TERMS REVIEW page 602 n notes receivable n interest income n dishonored note CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 20 -3