LESSON Learning Objectives 9 3 Accounting for Installment

LESSON Learning Objectives 9 -3 Accounting for Installment Notes Receivable LO 6 Journalize transactions for installment notes receivable. LO 7 Describe and illustrate the reclassification and reversing entries for installment notes receivable. © 2015 Cengage Learning. All Rights Reserved.

Issuing an Installment Note Receivable A note resulting from a sale that requires monthly payments of principal and interest is called an installment note. May 3. Sold a car to Mark Carver for $17, 144. 66 plus sales tax of $514. 34, receiving a $2, 659. 00 down payment and accepting a 60 -month, 10% installment note receivable for the balance, $15, 000. Note Receivable No. 325. Debit Notes Rec. for Note Principal 1 Credit 2 Sales for Sales Amount © 2015 Cengage Learning. All Rights Reserved. Lesson 9 -3 LO 6 The sale is recorded as revenue at the time of the sale. Credit Sales 3 Tax Payable Debit Cash for Down Payment 4 SLIDE 2

Lesson 9 -3 Receiving a Monthly Payment on an Installment Note Receivable LO 6 August 2. Received cash for Mark Carver’s August payment, $196. 95, and interest, $121. 76; total, $318. 71. Receipt No. 503. 1 Credit Notes Rec. for Note Principal 2 Credit Interest Income for Interest Amount © 2015 Cengage Learning. All Rights Reserved. Debit Cash for Total Payment 3 SLIDE 3

Lesson 9 -3 Amortization Schedule • A schedule of the periodic payments on a note is called an amortization schedule. © 2015 Cengage Learning. All Rights Reserved. LO 6 Over time, the monthly payment stays the same but the amount of interest decreases and more principal is applied.

Lesson 9 -3 • Reclassification Entry for Installment Notes Receivable LO 7 An entry that transfers account balances between accounts on one financial statement is called a reclassification entry. The impact of the reclassification entry is shown in the following section from Candor’s balance sheet. © 2015 Cengage Learning. All Rights Reserved.

Lesson 9 -3 Reclassification Entry for Installment Notes Receivable LO 7 ● After a reclassification entry, the Current Portion of Notes Receivable appears in the Current Assets section. Notes Receivable, the noncurrent portion of future principal payments, is presented after plant assets. © 2015 Cengage Learning. All Rights Reserved.

Lesson 9 -3 Reversing Entry for a Reclassification Entry After the reversing entry is posted, the balance of Notes Receivable represents the total outstanding principal of installment notes receivable. © 2015 Cengage Learning. All Rights Reserved. LO 7

Lesson 9 -3 Audit Your Understanding 1. When would the sale of a boat financed with an installment note be recorded as revenue? ANSWER At the time of sale. © 2015 Cengage Learning. All Rights Reserved. SLIDE 8

Lesson 9 -3 Audit Your Understanding 2. What dollar amounts are presented on an amortization schedule? ANSWER Beginning balance, interest, principal, and ending balance. © 2015 Cengage Learning. All Rights Reserved. SLIDE 9

Lesson 9 -3 Audit Your Understanding 3. Over the term of an installment note, what changes occur to the monthly payment, interest, and principal? ANSWER The monthly payment does not change, the interest decreases, and the principal increases. © 2015 Cengage Learning. All Rights Reserved. SLIDE 10

Lesson 9 -3 Audit Your Understanding 4. What amount of installment notes receivable should be classified as a current asset? ANSWER The total principal payments expected to be collected during the next fiscal period. © 2015 Cengage Learning. All Rights Reserved. SLIDE 11