Accounting Ch 26

8/12/2019 Accounting Ch 26

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Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting

Businesses issue two types of notes:

interest-bearing notes and non-interest-bearing notes. Businessesrecord the receipt of a note receivableas well as the payment of the note.

Glencoe Accounting Copyright by The McGraw-Hill Companies, Inc. All rights reserved.

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Explain how businesses use promissory notes.

Calculate and record notes payable and notes receivable.

Explain the difference between interest-bearing and non-interest-bearing notes.

Journalize transactions involving notes payable.

Journalize transactions involving notes receivable.

Glencoe Accounting Copyright by The McGraw-Hill Companies, Inc. All rights reserved.

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Key Terms

promissory note

note payable

note receivable

principal

face value

term

issue date

Promissory NotesSection 26.1

payee

interest rate

maturity date

maker

interest

maturity value

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A Promise to Pay


HowPromissoryNotes Are

Used

Paying for Products

Paying for Services

Lending

Borrowing

promissory noteA written promise to pay a certain amount of money

at a specific time.Home


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A Promise to Pay


Two Types of

Promissory Notes

Note Payable

Note Receivable

note payableA promissory note issued to a creditor.

note receivableA promissory note that a business accepts

from a customer.Home


7/34Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting

A Promise to Pay


See page 755Home



A Promise to Pay


Calculating a maturity date using a time calendar

Locate the issue datein the Day of month

column. Move acrossto the issue month to

find the day of the year

(September 14 is 257).

Add the number ofdays in the term to the

day of the year(90+257=347).

Find this number inthe month columns(347 corresponds to

December 13).

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Calculation ofInterest on a Note


Interest on a Promissory Note IsBased on Three Factors

Principal

Interest Rate

Term of the Note

interest

The fee charged forthe use of money

stated as apercentage of the

principal.

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Interest = Principal x Interest Rate x Time

Calculating Interest Using a Formula

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Calculating Interest Using an Interest Table

Find the term of the note in the Day column.

Follow the row until you reach the column for the interest rate.Where they intersect is the factor (per $100 of principal).

Divide the principal of the note by 100.

Multiply the result by the factor to find the amount of interest.

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Calculating Interest Using an Interest Table

See page 758Home



Key Terms

long-term liabilities

interest-bearing note payable

non-interest-bearing note payable

bank discount

proceeds

other expense

Notes PayableSection 26.2

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Interest-BearingNotes Payable


What Are

Long-Term Liabilities?

long-term liabilitiesDebts that are not required to be paid within the

next accounting period.

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Business Transaction

On April 3 TheStarting Line

borrowed $7,000from State StreetBank and issueda 90-day, 12%note payable to thebank, Note 6.

See pages 760761

Recording the Issuance of anInterest-Bearing Note Payable

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On July 2 The Starting Line issued Check 3892 for $7,207.12 payable toState Street Bank in payment of the note payable issued April 3.

See page 761

Recording the Payment of anInterest-Bearing Note Payable

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Non-Interest-BearingNotes Payable


What Is a

Bank Discount?

bank discountThe interest charge deducted in advance on a

non-interest-bearing note payable.

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What Are

Proceeds?

proceedsThe cash actually received by the borrower on a

non-interest-bearing note payable.

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Calculating Non-Interest-Bearing Notes Payable

Face Value x Discount Rate x Time = Bank Discount

$1,500 x 0.12 x 90/365 = $ 44.38

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On June 12 The Starting Line signed a $1,500, 90-day non-interest-bearingnote payable that First Federal Bank discounted at a rate of 12%, Note 13.

See page 763764

Recording the Issuance of aNon-Interest-Bearing Note Payable

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On June 12 The Starting Line signed a $1,500, 90-day non-interest-bearingnote payable that First Federal Bank discounted at a rate of 12%, Note 13.

Recording the Issuance of aNon-Interest-Bearing Note Payable

See page 763764

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The Interest Expense

account is classified as an

other expense.

other expenseA nonoperating expense; an expense that does not

result from the normal operations of the business.

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See page 766

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Key Term

other revenue

Notes ReceivableSection 26.3

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Recording the Receiptof a Note Receivable


NotesReceivable

InterestIncome

An asset account, and its normalbalance is a debit.

An other revenue account

other revenueNonoperating revenue that a business receivesfrom activities other than its normal operation.

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On March 1 The Starting Line sold $1,750 of merchandise on account to Joe Dimaio.That transaction was recorded in The Starting Lines sales journal. Joe cannot pay his

account by the due date. On April 8 The Starting Line received a 60-day, 12.5% note

dated April 6 for $1,750 from Joe Dimaio to settle the account receivable, Note 4.

See page 768769

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On March 1 The Starting Line sold $1,750 of merchandise on account to Joe Dimaio.That transaction was recorded in The Starting Lines sales journal. Joe cannot pay his

account by the due date. On April 8 The Starting Line received a 60-day, 12.5% note

dated April 6 for $1,750 from Joe Dimaio to settle the account receivable, Note 4.

See page 768769

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Recording the Paymentof a Note Receivable



On June 7 The Starting Line received a check dated June 5 for $1,785.96from Joe Dimaio in payment of the $1,750 note of April 6 plus interest of

$35.96, Receipt 996.

See page 769

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Question 1

Calculate the interest for the following:

Use the formula: Principal X Interest Rate = Time

* $2,500.00 X .12 X 3/12

$ 75.00

163.56

2,310.00

49.73

*

**94.50

** Annual Interest = $31.50 X 3 years

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Question 2

Why is interest received from customers considered other revenue?

This is revenue from activities other than the normal operationsof the business. If a company is not in the business of lendingmoney, the revenue from this transaction is considerednonoperating revenue.

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Accounting Ch 26