notes receivable

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NOTES RECEIVABLE

CHAPTER 14CHAPTER 14

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Notes receivableNotes receivable

Credit sale:durable goods of

high value

Promissory note

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Promissory NotesPromissory Notes

Accounts Receivable

Formal

Notes Receivable

A promissory note is an unconditional promise to pay a definite sum of money on demand or at a future date.

Promissory note

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Maker

The person who signs the note and thereby promises

to pay

Payee

The person to whom payment is to be made

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$1200 Wheaton, Illinois January 5, 1999

Sixty days after date I promise to pay to

the order of

Yankee Brothers, Inc.

One thousand two hundred --------------------------------- Dollars

Payable at

Wheaton Mountain Bank

Value received with interest at per annumNo. Due

The Kitchen Taylor42 March 6, 1999

12%

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$1200 Wheaton, Illinois January 5, 1999

Sixty days after date I promise to pay to

the order of

Yankee Brothers, Inc.

One thousand two hundred --------------------------------- Dollars

Payable at

Wheaton Mountain Bank

Value received with interest at per annumNo. Due

The Kitchen Taylor42 March 6, 1999

12%

TermPayee

Maker

Due Date

Interest Rate

Principal

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Maturity dateMaturity date

The maturity date can be calculated according to the following three methods :

1. a specific date, such as “November 11th, 2006”

2. a specific number of months after the date of the note, such as “2 months after date”

3. a specific number of days after the date of the note, for example, “60 days after date”

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Determining the maturity dateDetermining the maturity date

Life of the note expressed in terms of months

-- the due date is found by counting the

months from the date of issue

•Example: If a note is issued on April 20th that

will be due in three months, the note will be

due on July 20th in the same year.

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Life of the note is expressed in terms of days

--you need to count the days

--include the issue date and exclude the maturity date

--include the maturity date and exclude the issue date

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Example: a note dated on October 3rd, and due in 60 days, would be due on December 2nd

Including the maturity date and excluding the issue date

Days left in October 28 daysDays in November 30 days Days in December 2 days Total 60 days

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Example: a note dated on October 3rd, and due in 60 days, would be due on December 2nd

Including the issue date and excluding the maturity date

Days left in October 29 daysDays in November 30 days Days in December 1 days Total 60 days

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Determining the duration of noteDetermining the duration of note If the maturity date is stated in a specific number of

days from the date of note --the duration is obvious

when the maturity date is determined on the specific date --you need to count the days

--include the issue date and exclude the maturity date

--include the maturity date and exclude the issue date

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Determining the duration of noteDetermining the duration of note

Example: the note is issued on September 6th and the maturity date December 11th

Including the maturity date and excluding the issue date

Days left in September 24 days Days in October 31 daysDays in November 30 daysDays in December 11 days Total days 96 days

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Determining the duration of noteDetermining the duration of note

Example: the note is issued on September 6th and the maturity date December 11th

Including the issue date and excluding the maturity date

Days left in September 25 days Days in October 31 daysDays in November 30 daysDays in December 10 days Total days 96 days

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Maturity Value of the noteMaturity Value of the note

Non-interest note

Maturity value Principal (Face value )

Interest-bearing note

Maturity value Principal Interest=

=

+

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Interest calculationInterest calculation

I = P × R × T

Interest Principal Rate Time

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Maturity Value of the interest-Maturity Value of the interest-bearing notebearing note

Maturity value

=

Principal + Interest=

Principal + P × R × T

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Maturity Value of the interest-Maturity Value of the interest-bearing note bearing note ExampleExample

A 60-day, 6%, $4000 note

The maturity value

Maturity value = $4,000 + $4,000 × 6% × 60/360

= $4,000 + $40

= $4,040

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DiscountDiscount

To discount a note means to take out the interest in advance.

Proceeds = Maturity value – Discount

When a note is discounted, the amount that the payee receives is called proceeds

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DiscountDiscount

Discount =Maturity value × Interest rate × Time

Proceeds =Maturity value – Maturity value × Interest × Time

= Maturity value × (1- interest rate × time)

The number of days remaining until the maturity date

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Discount Discount ExampleExample

Now, let’s look at an example

of calculating proceeds

…

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Suppose that a 90-day note has a maturity value of $2,000, is due in 60 days, and is discounted at 6% rate of interest.

The proceeds

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Proceeds = Maturity value (1- interest rate × time) ×

= $2,000 × (1 – 6% × 60/360)

= $2,000 × 99%

= $1,980

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ExerciseExercise

A $4,000, 90-day note bearing 8% rate of interest, is discounted at 10 % on the date 30 days before the maturity date.

The proceeds

The maturity value

Discount

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ExerciseExercise

Maturity value = Principal + Interest

= $4,000+ $4,000 × 8% 90/360×= $4,080

Discount

=

Maturity value × Discount rate × Time=

$4,080 × 10% × 60/360

=

$34

Proceeds

=

Maturity value – Discount

= $4,080 – $34 = $4,046

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ExerciseExercise

Assume that a $ 4,000, 8%, 90-day note is received from a customer on August 1st.

The entry?

August 1st Notes Receivable $4,000

Revenues from sales $4,000

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ExerciseExercise

When the note including interest is collected 90 days later

The entry?

October 30th Cash $4,320

Notes Receivable $4,000

Interest Income $320

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ExerciseExercise

If the note is dishonored, the payee or holder of the note will transfer the notes receivable and interest income to accounts receivable.

The entry?

October 30th Accounts Receivable $4,320



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ExerciseExercise

If the company discounts the note on September 30th and the discount rate is 10%

Maturity value = $4,000+$320 = $4,320

Discount = $4,320 × 10% × 30/360 = $36

Proceeds = $4,320 - $36 = $4,284

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ExerciseExercise

The entry?



September 30th Cash $4,284

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WE ARE SAILING RIGHT ALONG!!

notes receivable

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