Unit 6 Notes Receivable and Notes Payable Promissory

Unit 6 Notes Receivable and Notes Payable

Promissory Note Interest - cost of using money for a period of time Formal written promise by a borrower to pay a certain sum at a fixed future date Note payable – amounts the company owes to others Note receivable – amounts owed to a company by others

Promissory Note Principal - amount being borrowed Term - Amount of time money is being borrowed Payee - company or person to whom the note is payable Annual interest rate - rate being charged to borrower Maturity date - due date of promissory note Maker - the one promising to pay the note plus interest when it comes due

Promissory Note Principal Term Payee Annual Interest Rate Maturity Date Maker

Calculate Interest = Principal x Rate x Time Calculate interest for exact number of days based on 360 -day year Interest = $40, 000 x 11% x (90/360) = $1, 100

Determine Maturity Date Days in term on note Number of days remaining in June (30 days – 2) Days left on note after June Days in July August Due date: August 31 90 28 62 31 31

Maturity Date by Number of Months If note is expressed in months, count the months from the date of issue, regardless of number of days in each month. A note issued on January 31 for 3 months, has a maturity date of April 30.

Time Extension of a Note At the end of a credit period, a borrower may ask for an extension. A time frame and interest rate are agreed upon between buyer and seller. Accounts Receivable and Accounts Payable both decrease. Notes Receivable and Notes Payable both increase.

Dishonored Note A note that was not paid at maturity by the maker Also known as defaulting

Time Extension of a Note The initial sale of merchandise on books of buyer and seller

Time Extension of a Note A shift in assets for seller and a shift in liabilities for buyer

Time Extension with a Note

Time Extension with a Note

Note Due and Paid at Maturity Interest = Principal x Rate x Time = $6, 000 x. 09 x (90/360) = $135 Maturity Value = Principal + Interest = $6, 000 + 135 = $6, 135

Note Due and Paid at Maturity

Note Due and Paid at Maturity

Dishonored Note Assume Connors Co. dishonors the note, rather than paying on November 8.

Note Due and Paid at Maturity

Dishonored Note Connors Co. pays the note on November 16.

Note Due and Paid at Maturity

Note Given in Exchange for Equipment Purchased Seller ◦ Debit Notes Receivable ◦ Credit Sales Buyer ◦ Debit Equipment ◦ Credit Notes Payable

Interest: The Need for Adjustments On December 3, 20 X 4, Rochester Company received a $6, 000, 60 -day, 11% note from Larry Company in payment of account past due.

Interest: The Need for Adjustments Larry Co. Accounts Payable Notes Payable

Interest: The Need for Adjustments Dec. 3, Jan. 31, Adjusting entry is required to record interest incurred or earned to date.

Interest: The Need for Adjustments Step 1: Calculate interest on the note: $6, 000 x. 11 x 60/360 = $110. 00 Step 2: Calculate the number of days the note has already run before the end of the current period Dec. 31 - Dec. 3 = 28 days

Interest: The Need for Adjustments Step 3: Calculate interest incurred (earned) for this period. 28/60 x $110 = $51. 33 Step 4: Prepare the adjusting journal entries.

Interest: the Need for Adjustments Larry Co.

On Due Date