8.3 Notes Receivable Flashcards
what is a promissory note
written promise to pay a specified amount of mooney on demand (whenever the payee demands repayment OR a fixed date in the future)
when are promissory notes used
1) when individuals/companies lend/borrow money
2) when the amount of transaction and the length of the credit period exceed normal limits
3) to settle an account receivable where payment cannot be made w/n credit period
Who are the parties in a promissory note
1) maker: the party who promise to pay
2) payee: the part who will be paid
for the payee what would the amount of money on a note be in an account
asset “note receivable”
for the maker of the note, what would the amount of money on a note be
note payable (liability)
other names for note recievable/payable
loan receivable/loan payable
what does the promissory note detail
names of the maker, payee, principal amount, loan period, interest rate, whether interest is payable monthly or at maturity (the notes due date) along with the principal amount
also could include what collateral is pledged if unpaid note
similarities b/w a/r and n/r
1) financial asset
2) credit instrument (promise to pay)
3) reported on sofp at carrying amount
4) related credit losses reported on soi
differneces b/w a/r and n/r
A/R:
-informal promise to pay
-bears interest only if past due
-short term (30-60)
-normal classidifed as a current asset
N/R:
-formal/written promise to pay
-bears interest from the date issued
-can be short term or long term
-can be ca or nca
how is interest calculated on interest bearing note?
face value of note (principal) x annual interest rate x time in terms of one year = interest income
ex:
principle x ann int rate x #/12= interest income
The interest rate specified in a note receivable is an annual rate. It must be pro-rated when calculating interest for periods of less than 12 months.
!!
how are n/r recorded on JE WHEN someone cant pay a/r due?
the payee:
DR: N/R principal amount
CR: A/R principal amount
(the amount recorded in the PRINCIPAL AMOUNT!!!! With no interest because interest income is earned w passage of time)
how do we do a JE for interest income
1) use the formula for int income=(principal x annual int x #/12)
Dr: interest receivable int income
Cr: intereest income int income
what is derecognizing notes receivable
normal process of removing n/r from books when the amount is collected from customers
there are two possibilities:
1) honoured n/r
2) dishonoured n/r
why do we an interest recievable account interest or debiting interest income to notes recievable acc?
since N/R is a FORMAL credit instument, RECORDED PRINCIPAL MUST NOTTT change
what is the JE when the amount of the note is collected
Dr Cash (n/r + int receivable)
Cr note receiveable (n/r)
Cr interest recievable (int income)
how do you do a JE for uncollectible n/r
DR: credit losese
CR: Allowance for expected credit losses
what are honoured n/r
-show JE
collected notes receivable
dr Cash
cr N/r
cr Interest/receivable
what are dishonoured n/r
note that is not paid in full at maturity, this note is no longer negotiable
dishonoured note receivable is no longer negotiable. However, the payee still has a claim against the maker of the note for both the principal and any unpaid interest. Therefore, if eventual collection is expected, the Notes Receivable account balance and related interest are transferred to an account receivable by debiting Accounts Receivable for the total of the principal amount of the note and the interest due.As shown below, the journal entry to record this is identical to the one above where the note was honoured, except that the debit is to Accounts Receivable rather than to Cash:
\
dishonoured note recievable- if there is still hope of collection
JE
JE:
DR A/r
Cr n/r
Cr I/r
dishonoured note recievable- if there is no hope of collection
JE
Dr Credit Losses
Cr N/r
CR Int receivable
If a company had a material amount of notes receivable or they were a regular feature of the business, then an allowance would have been established. The write-off entry above would then have debited Allowance for Expected Credit Losses, rather than Credit Losses. Because few companies have large numbers of notes receivable, you can assume in the end-of-chapter material that an allowance was not previously established for any estimated uncollectible notes receivable.
If a company had a material amount of notes receivable or they were a regular feature of the business, then an allowance would have been established. The write-off entry above would then have debited Allowance for Expected Credit Losses, rather than Credit Losses. Because few companies have large numbers of notes receivable, you can assume in the end-of-chapter material that an allowance was not previously established for any estimated uncollectible notes receivable.
