14

Notes Receivable and Notes Payable

ANSWERS TO DISCUSSION QUESTIONS 1. A company may use Notes Payable instead of Accounts Payable: A. To get additional time to settle past due accounts. B. To borrow money from bank. C. To have a stronger claim legally. The parts of a promissory note are: Amount borrowed; length of note; payee; rate of interest; maker; and maturity date. Note expressed in months does not need a table or calendar. Months are counted regardless of number of days in each month. Reject. Notes Receivable is a current asset. The information on the note acts as the subsidiary ledger. Notes that have not matured are listed in the Notes Receivable account. Note is transferred back to Accounts Payable or Accounts Receivable. At this time, the interest expense or interest income is recorded. A. Find maturity value B. Calculate discount period C. Calculate bank discount D. Calculate the proceeds Contingent liability is the potential liability of one who discounts a note if the maker of note defaults at maturity date. When one is discounting ones own note. Debit is the normal balance of the Discount on Notes Payable account.
Maturity Value of Note Bank Interest Rate = Effective Interest Rate Amount of Cash Proceeds Received from Note

2. 3. 4. 5. 6. 7. 8.

9. 10. 11. 12. 13.

Interest Expense Discount on Notes Payable

519

SOLUTIONS TO CHAPTER 14 MINI EXERCISES 1. A. July 8 = 189th day + 120 309 search in table S Nov. 5 B. Oct. 8 = 281 365 281 84 days left in old year S Jan. 6 2. A. B.
$6, 000 .06 $8,000 .07 9 = $270 + $6, 000 = $6,270 12 70 = $108.89 + $8, 000 = $8108.89 , 360

3. A. Purchases Accounts Payable, Frank Co. Bought on acct. B. Accounts Payable, Frank Co. Notes Payable Transferred to note pay. C. Notes Payable Interest Expense Cash Paid off note on due date 4.
$9,000 .08 90 = $180 Interest 360

7,000 7,000 7,000 7,000 7,000 140 7,140

$180 100 $ 80 Loss 5. A. $1,000 .06 60 = $10 Interest 360 MV = $1,000 + $10 = $1,010 B. August 30 August 10 20

60 20 40 Discount Period

40 = $8.98 Bank Discount 360 D. $1,010 $8.98 = $1,001.02 C. $1,010 .08 6. Cash Notes Receivable Interest Income Discounted Note Rec 7. Accounts Receivable, Aluin Co. Cash Customer Dishonored Note 1,001.02 1,000.00 1.02 1,015 1,015

520

SOLUTIONS TO CHAPTER 14 MINI EXERCISES (CONTINUED) 8. Cash Discount on Notes Payable Notes Payable 9. Interest Expense Discount on Notes Payable Adjustment for interest A Contra Liab. Liab. 100 100 c c c Dr. Dr. Cr. 4,700 300 5,000

521

SOLUTIONS TO EXERCISES 14-1. (A) (B) (C) $17,000 .07 1 = $1, 90 1 7 $20,000 .10 = $1166.67 , 12 80 $9,000 .12 = $240 360 14 16 Feb. 16 17 31 30 12 Oct. 12 5 31 31 8 Sept. 8

14-2. (A) Number of days remaining in January (31 - 17) Days in February to reach 30 (B) Number of days remaining in July (31 14) Days in August Days in September Days in October to reach 90 (C) June, July, August, September 30 (D) Number of days remaining in June (30 25) Days in July Days in August Days in September to reach 75 14-3. (A) Jan. 17 17 days 30 47 days-search S Feb. 16 195 90 285 days-search S Oct. 12 176 75 251 days-search S Sept. 8 180 = $360 360

(B) July 14

(C) No Table (D) June 25

14-4. (1) Maturity Value = $9,000 .08 = $9,360

(2) Discount Period = 180 67 = 113 days July 21 202 May 15 135 67 113 (3) Bank Discount = $9,360 .09 360 = $ 264.42 (4) Proceeds = $9,360 $264.42 = $9,095.58

522

EXERCISES (CONTINUED) (A) Cash Interest Income Notes Receivable Discounted Note Rec. (B) Account ReceivableBlue Co. Cash Dishonored Note Rec. 14-5. $30,000 .10 120 = $1,000 360 9,095.58 95.58 9,000.00 9,360 9,360

Cash 29,000 Discount on Notes Payable 1,000 Notes Payable Borrowed money with discounted interest

30,000

523

SOLUTIONS TO A PROBLEMS PROBLEM 14A-1

GENERAL JOURNAL PAGE 1

Date 20X9 Jun. 11

Account Titles and Description BuyerRover Co. Purchases Accounts PayableLee Co. Bought on Account Accounts PayableLee Co. Notes Payable Transferred to Notes Payable Notes Payable Interest Expense Cash Paid off note plus interest (Int = $5,000 .08 90/360 = $100) Notes Payable Interest Expense Accounts PayableLee Co. Dishonored note to Lee Accounts PayableLee Co. Cash Paid amount due to Lee SellerLee Co. Accounts ReceivableRover Co. Sales Sold on Account Notes Receivable Accounts ReceivableRover Co. Transferred to Notes Receivable Cash Interest Income Notes Receivable Collected on note plus interest
524

PR

Dr. 7 0 0 0 00

Cr.

7 0 0 0 00

Jul. 11

5 0 0 0 00 5 0 0 0 00

Oct. 9

5 0 0 0 00 1 0 0 00 5 1 0 0 00

5 0 0 0 00 1 0 0 00 5 1 0 0 00

15

5 1 0 0 00 5 1 0 0 00

Jun. 11

7 0 0 0 00 7 0 0 0 00

Jul. 11

5 0 0 0 00 5 0 0 0 00

Oct. 9

5 1 0 0 00 1 0 0 00 5 0 0 0 00

PROBLEM 14A-1 (CONTINUED)

GENERAL JOURNAL PAGE 2

Date 9

Account Titles and Description Accounts ReceivableRover Interest Income Notes Receivable Dishonored note from Rover Cash Accounts ReceivableRover Collected past due amount from Rover

PR

Dr. 5 1 0 0 00

Cr. 1 0 0 00 5 0 0 0 00

15

5 1 0 0 00 5 1 0 0 00

525

PROBLEM 14A-2 A. Maturity Value = Principal + Interest I = $30,000 .09 90/360 = $675 MV = $30,000 + $675 = $30,675 B. By Table June 20 = 171 May 1 = 121 50 90 50 = 40 Days Bank Holds Note By Table May 1 = 121 + 90 211 Note Due on July 30

C. Bank Discount = $30,675 .10 40/360 = $340.83 D. Proceeds = $30,675 $340.83 = $30,334.17

APPLES CO. GENERAL JOURNAL

Date 20X4 Jul. 16

Account Titles and Description Cash Interest Income Notes Receivable Discounted Note from Fletcher

PR

Dr. 30 3 3 4 17

Cr. 3 3 4 17 30 0 0 0 00

526

PROBLEM 14A-3
JOYE CO. GENERAL JOURNAL PAGE 2

Date 20X1 Jun. 18

Account Titles and Description Cash Discount on Notes Payable Notes Payable Borrowed at a discount ($40,000 .10 90/360 = $1,000) Interest Expense Notes Payable Discount on Notes Payable Cash Paid off note Cash Discount on Notes Payable Notes Payable Borrowed at a discount ($20,000 .11 120/360 = $733.33) Interest Expense Discount on Notes Payable Adjustment for interest (59/120 $733.33 = $360.55)

PR

Dr. 39 0 0 0 00 1 0 0 0 00

Cr.

40 0 0 0 00

Sept. 16

1 0 0 0 00 40 0 0 0 00 1 0 0 0 00 40 0 0 0 00

Nov. 2

19 2 6 6 67 7 3 3 33 20 0 0 0 00

Dec. 31

3 6 0 55 3 6 0 55

Time Expired

Dec 31 = 365 Nov 2 = 306 59

527

PROBLEM 14A-4
ROCHESTER COMPANY GENERAL JOURNAL PAGE 2

Date 200X Apr. 18

Account Titles and Description Notes Receivable Accounts ReceivableMark Castle Transferred to Notes Receivable Allowance for Doubtful Accounts Accounts ReceivableHal Balmer Wrote off Account Cash Interest Income Notes Receivable Mark Castle paid note ($15,000 .11 80/360 = $366.67) Accounts PayableReech Co. Notes Payable Transferred to Notes Payable Accounts ReceivableHal Balmer Allowance for Doubtful Accounts Reinstate written off account Cash Accounts ReceivableHal Balmer Collected from customer Cash Discount on Notes Payable Notes Payable Borrowed at a discount ($5,000 .10 90/360 = $125) Notes Receivable Accounts ReceivableBeverly Fields Transferred to Notes Receivable

PR

Dr. 15 0 0 0 00

Cr. 15 0 0 0 00

May 9

6 0 0 00 6 0 0 00

Jul.

15 3 6 6 67 3 6 6 67 15 0 0 0 00

Nov. 11

9 0 0 0 00 9 0 0 0 00

15

6 0 0 00 6 0 0 00

15

6 0 0 00 6 0 0 00

Dec. 3

4 8 7 5 00 1 2 5 00 5 0 0 0 00

10 0 0 0 00 10 0 0 0 00

528

PROBLEM 14A-4 (CONCLUDED)

ROCHESTER COMPANY GENERAL JOURNAL PAGE 3

Date 200X 11

Account Titles and Description Notes Payable Interest Expense Cash Paid Reech Co. ($9,000 .12 30/360 = $90) Notes Receivable Accounts ReceivableLarry Company Transferred to Notes Receivable Cash Interest Income Notes Receivable Discounted Beverly Fields Note (I = $10,000 .12 60/360 = $200) (Days = 60 - 23 = 37) (Bank Discount = ($10,200 .13 37/360 = $136.28) (Proceeds = $10,200 - $136.28 = $10,063.72) Interest Expense Discount on Notes Payable Adjustment for interest on discounted Note Payable (28/90 $125 = $38.89) Dec. 31 = 365 Dec. 3 = 337 28 Interest Receivable Interest Income Adjustment for interest on Note Receivable ($20,000 .11 60/360 = $366.67) (15/60 $366.67 = $91.67)

PR

Dr. 9 0 0 0 00 9 0 00

Cr.

9 0 9 0 00

16

20 0 0 0 00 20 0 0 0 00

28

10 0 6 3 72 6 3 72 10 0 0 0 00

Dec. 31

3 8 89 3 8 89

31

9 1 67 9 1 67

529

SOLUTIONS TO B PROBLEMS PROBLEM 14B-1

GENERAL JOURNAL PAGE 1

Date 20X9 Jul. 10

Account Titles and Description BuyerConnors Co. Purchases Accounts PayableLee Co. Bought on Account Accounts PayableLee Co. Notes Payable Transferred to Notes Payable Notes Payable Interest Expense Cash Paid off note plus interest (Int = $6,000 .09 90/360 = $135) Notes Payable Interest Expense Accounts PayableLee Co. Dishonored note to Lee Accounts PayableLee Co. Cash Paid amount due to Lee SellerLee Co. Accounts ReceivableConnors Co. Sales Sold on Account Notes Receivable Accounts ReceivableConnors Co. Transferred to Notes Receivable Cash Interest Income Notes Receivable Collected note plus interest
530

PR

Dr. 8 0 0 0 00

Cr.

8 0 0 0 00

Aug. 10

6 0 0 0 00 6 0 0 0 00

Nov. 8

6 0 0 0 00 1 3 5 00 6 1 3 5 00

6 0 0 0 00 1 3 5 00 6 1 3 5 00

16

6 1 3 5 00 6 1 3 5 00

Jul. 10

8 0 0 0 00 8 0 0 0 00

Aug. 10

6 0 0 0 00 6 0 0 0 00

Nov. 8

6 1 3 5 00 1 3 5 00 6 0 0 0 00

PROBLEM 14B-1 (CONTINUED)

GENERAL JOURNAL PAGE 2

Date 8

Account Titles and Description Accounts ReceivableConnors Co. Interest Income Notes Receivable Dishonored note from Connors Cash Accounts ReceivableConnors Co. Collected past due amount from Connors

PR

Dr. 6 1 3 5 00

Cr. 1 3 5 00 6 0 0 0 00

16

6 1 3 5 00 6 1 3 5 00

531

PROBLEM 14B-2 A. Maturity Value = Principal + Interest I = $40,000 .11 90/360 = $1,100 MV = $40,000 + $1,100 = $41,100 B. By Table July 16 = 197 June 2 = 153 44 90 44 = 46 Days Bank Holds Note By Table June 2 = 153 + 90 243 Note Due on Aug. 31

C. Bank Discount = $41,100 .12 46/360 = $630.20 D. Proceeds = $41,100 $630.20 = $40,469.80

APPLES CO. GENERAL JOURNAL

Date 20X4 Jul. 16

Account Titles and Description Cash Interest Income Notes Receivable Discounted Note from Fletcher

PR

Dr. 40 4 6 9 80

Cr. 4 6 9 80 40 0 0 0 00

532

PROBLEM 14B-3
JOYE CO. GENERAL JOURNAL PAGE 2

Date 200X May 9

Account Titles and Description Cash Discount on Notes Payable Notes Payable Borrowed at a discount ($25,000 .10 90/360 = $625) Interest Expense Notes Payable Cash Discount on Notes Payable Paid off note Cash Discount on Notes Payable Notes Payable Borrowed at a discount ($18,000 .11 120/360 = $660) Interest Expense Discount on Notes Payable Adjustment for interest (85/120 $660 = $467.50)

PR

Dr. 24 3 7 5 00 6 2 5 00

Cr.

25 0 0 0 00

Aug. 7

6 2 5 00 25 0 0 0 00 25 0 0 0 00 6 2 5 00

Oct. 7

17 3 4 0 00 6 6 0 00 18 0 0 0 00

Dec. 31

4 6 7 50 4 6 7 50

Dec 31 = Oct 7 = Time Expired

365 280 85

533

PROBLEM 14B-4
ROCHESTER COMPANY GENERAL JOURNAL PAGE 2

Date 200X May 12

Account Titles and Description Notes Receivable Accounts ReceivableMark Castle Transferred to Notes Receivable Allowance for Doubtful Accounts Accounts ReceivableHal Balmer Wrote off Account Cash Interest Income Notes Receivable Mark Castle paid note ($13,000 .09 90/360 = $292.50) Accounts PayableReech Co. Notes Payable Transferred to Notes Payable Accounts ReceivableHal Balmer Allowance for Doubtful Accounts Reinstate written off account Cash Accounts ReceivableHal Balmer Collected from customer Cash Discount on Notes Payable Notes Payable Borrowed at a discount ($10,000 .09 90/360 = $225) Notes Receivable Accounts ReceivableBeverly Fields Transferred to Notes Receivable

PR

Dr. 13 0 0 0 00

Cr. 13 0 0 0 00

Jun. 15

9 0 0 00 9 0 0 00

Aug. 10

13 2 9 2 50 2 9 2 50 13 0 0 0 00

Nov. 2

20 0 0 0 00 20 0 0 0 00

18

9 0 0 00 9 0 0 00

18

9 0 0 00 9 0 0 00

Dec. 2

9 7 7 5 00 2 2 5 00 10 0 0 0 00

6 0 0 0 00 6 0 0 0 00

534

PROBLEM 14B-4 (CONCLUDED)

ROCHESTER COMPANY GENERAL JOURNAL PAGE 3

Date 200X 2

Account Titles and Description Notes Payable Interest Expense Cash Paid Reech Co. ($20,000 .08 30/360 = $133.33) Notes Receivable Accounts ReceivableLarry Company Transferred to Notes Receivable Cash Interest Income Notes Receivable Discounted Beverly Fields Note (I=$6,000 .11 60/360 = $110) (Days = 60 - 25 = 35) (Bank Discount = ($6,110 .12 35/360 = $71.28) (Proceeds = $6,110 $71.28 = $6,038.72) Interest Expense Discount on Notes Payable Adjustment for interest on discounted Note Payable (29/90 $225 = $72.50) Interest Receivable Interest Income Adjustment for interest on Notes Receivable ($2,000 .11 60/360 = $36.67) (15/60 $36.67 = $9.17)

PR

Dr. 20 0 0 0 00 1 3 3 33

Cr.

20 1 3 3 33

16

2 0 0 0 00 2 0 0 0 00

28

6 0 3 8 72 3 8 72 6 0 0 0 00

Dec. 31

7 2 50 7 2 50

31

9 17 9 17

535

SOLUTION TO REAL WORLD APPLICATION #1 1. $2,000 .12 60 = $40 360 MV = $2,040 + 9 $2,049 Protest Fee

March 19 78 Feb. 17 48 30 30 days I = $2,049 .14 360 = 23.91 Total pay back $2,049 + $23.91 = $2,072.91

SOLUTION TO REAL WORLD APPLICATION #2 A) NOTES RECEIVABLE

$20,000 .12 150 = $1000 , 360

Dec. 31 Nov. 25

365 329 36

36 $1,000 = $240 150

Dec. 31 Interest Receivable Interest Income NOTES PAYABLE 30 $33,600 .15 = $420 360
15 days $420 = $210 30 days

240 240

Dec. 31 Interest Expense Interest Payable

210 210

536

B) Reversing Entries are an option as follows:

T-Accounts after Reversing When Co. is Paid Int. Receivable 240 240 Cash Interest Income Notes Receivable Int. Income 240 1,000 760 T-Accounts after Reversing When Note is Paid Interest Expense 210 Notes Payable Interest Expense Cash Interest Expense 420 210 210 33,600 420 34,020 Interest Payable 210 210 21,000 1,000 20,000 $760 is true amount of interest income in new year. Interest Income 240 Rev.

T-Accounts after receipt of note in new year.

T-Accounts after payment in new year

Balance of $210 is true amount of interest expense in new year.

SOLUTION TO REAL WORLD APPLICATION #3 The question in this case, is whether Kevin should tell his girlfriend confidential information about his friends. It is extremely unethical for Kevin to look up the financial records of his friends. As a teller, he is supposed to be professional and not look up peoples records without their consent. Thus I would tell Kevin not to look up the records of his friends.

537