NOTES RECIEVABLE Read text ref. chapt. 9 p.434 - 438, demonstration problem p. 437

1. NOTES RECIEVABLERead text ref. chapt. 9 p.434 - 438, demonstration problem p. 437 • “A promissory note is an unconditional promise in writing (a legally binding agreement) to pay on demand or at a future date a definite sum of money.”  WHY A NOTE? MAKER: promises to pay; entity that borrows the money PAYEE: entity that lends the money Notes Recievable Chapt. 9, p. 434

2. INTEREST • Notes bare interest; the payee expects to receive the face value of the note receivable and also an interest payment. • Why do notes also have interest payments • P = face value or principle of the note • r = interest rate per year (p/a) • t = time  fraction of a year • I = interest Notes Recievable Chapt. 9, p. 434

3. NOTES • Notes Receivable have a maturity date, the date that payment on the note is due. All notes other than those payable on demand, are legally due 3 days after the maturity date “three days of grace”. However, interest is still charged on the three days of grace. Notes Recievable Chapt. 9, p. 434

4. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit May 1 Notes Receivable Accounts Receivable — Brent Company To record acceptance of Brent Company note. RECOGNIZING NOTES RECEIVABLE 1,000 1,000 Wilma Company receives a $1,000, 6% promissory note, due in two months (July 31) from Brent Company to settle an open account. Notes Recievable Chapt. 9, p. 434

5. Example: Jim-Bob Inc., unable to pay his $100,000 AP to Slim Co., negotiates prolonged payment as a Note journalize it! Note Receivable (Jim-Bob Inc.) $100,000 AR (Jim-Bob Inc.) $100,000 Acceptance of a note $100,000, 9.5% p/a from Jim-Bob Inc. Why would Slim Co. accept a note instead of demanding the AR from Jim-Bob? cash flow large credit sale stronger asset legal claim Notes Recievable Chapt. 9, p. 434

6. HONOUR OF NOTES RECEIVABLE • A note is honoured when it is paid in full at its maturity date. • Wolder Co. lends Higly Inc. $10,000 on June 1, accepting a 4.5% interest-bearing note, due in 4 months, on September 30. • Wolder collects the maturity value of the note from Higley on September 30. Notes Recievable Chapt. 9, p. 434

7. Example: An “honoured Note” - A 90 day $100,000 note receivable from Jim-Bob Inc. is due August 30th. The interest rate is 9.5% pa. The note was for settlement of a $100,000 A/R from Jim-Bob. Full payment is received Sept. 2. journalize receipt of payment Cash 102,420.55 Note Receivable (Jim-Bob Inc.) 100,000 Interest Revenue 2420.55 To record payment of $100,000, 9.5% note note recievable has been paid off! Notes Recievable Chapt. 9, p. 434

8. DISHONOUR (DEFAULT) OF NOTES • A dishonoured note is a note that is not paid in full at maturity. • A dishonoured note receivable is no longer negotiable. • Since the payee still has a claim against the maker of the note, the balance in Notes Receivable is usually transferred to Accounts Receivable. Notes Recievable Chapt. 9, p. 434

9. DEFAULT If the A/R (note) will ultimately not be collected, it will be written off by debiting the Allowance for Doubtful Accountsand no interest would be recorded. RENEWAL OF A NOTE: The maker and the payee of a note may agree that the note shall be renewed rather than paid at the maturity date. In this situation the old note should be canceled and a new note written. DEFAULT & RENEWAL Notes Recievable Chapt. 9, p. 434