NOTES RECEIVABLE

1. CHAPTER 14 NOTES RECEIVABLE

2. Notes receivable Promissory note Credit sale: durable goods of high value

3. Promissory Notes A promissory note is an unconditional promise to pay a definite sum of money on demand or at a future date. Promissory note Formal Accounts Receivable Notes Receivable

4. Promissory Notes The person who signs the note and thereby promises to pay Payee Maker The person to whom payment is to be made

5. Wheaton, Illinois $1200 January 5, 1999 after date I promise to pay to Sixty days the order of Yankee Brothers, Inc. One thousand two hundred --------------------------------- Dollars Payable at Wheaton Mountain Bank Value received with interest atper annum 12% Dennis Taylor No. Due 42 March 6, 1999 The Kitchen Taylor Promissory Notes

6. Term Wheaton, Illinois $1200 January 5, 1999 Payee after date I promise to pay to Sixty days the order of Principal Yankee Brothers, Inc. One thousand two hundred --------------------------------- Dollars Payable at Wheaton Mountain Bank Interest Rate Maker Value received with interest atper annum 12% Dennis Taylor No. Due 42 March 6, 1999 The Kitchen Taylor Due Date Promissory Notes

7. Maturity 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”

8. Determining 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.

9. Determining the maturity date • 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

10. Determining the maturity date 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 days Days in November 30 days Days in December 2 days Total 60 days

11. Determining the maturity date 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 days Days in November 30 days Days in December 1 days Total 60 days

12. Determining 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

13. Determining 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 days Days in November 30 days Days in December 11 days Total days 96 days

14. Determining 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 days Days in November 30 days Days in December 10 days Total days 96 days

15. Maturity Value of the note Non-interest note = Maturity value Principal (Face value ) Interest-bearing note = + Maturity value Principal Interest

16. Interest calculation I = P × R × T Interest Principal Rate Time

17. Maturity Value of the interest-bearing note = + Maturity value Principal Interest = + Principal P × R × T

18. Maturity Value of the interest-bearing note Example A 60-day, 6%, $4000 note ？ The maturity value + Maturity value = $4,000 $4,000 × 6% × 60/360 = $4,000 + $40 = $4,040

19. Discount 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

20. Discount The number of days remaining until the maturity date × × Discount = Maturity value Interest rate Time – = Proceeds Maturity value Maturity value × Interest × Time = × Maturity value (1- interest rate × time)

21. Discount Example Now, let’s look at an example of calculating proceeds …

22. Discount Example 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

23. Discount Example Proceeds = Maturity value × (1- interest rate × time) = $2,000 × (1 – 6% × 60/360) 99% = $2,000 × = $1,980

24. Exercise 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 maturity value Discount The proceeds

25. Exercise = + 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

26. Exercise 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

27. Exercise When the note including interest is collected 90 days later The entry? October 30th Cash $4,320 Notes Receivable $4,000 Interest Income $320

28. Exercise 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 Notes Receivable $4,000 Interest Income $320

29. Exercise 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

30. Exercise The entry? September 30th Cash $4,284 Notes Receivable $4,000 Interest Income $284

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