Discounting of Notes

Topics: Promissory note, Bond, Interest Pages: 14 (1415 words) Published: March 9, 2014
ACTG101 – HANDOUTS FINALS – TRANSACTIONS INCLUDING NOTES

Definition of Terms
* Notes receivable – claims supported by formal promises to pay usually in the form of notes * Negotiable promissory notes – an unconditional promise in writing made by one person to another, signed by the maker, engaging to pay on demand or at a fixed determinable future time a sum certain in money or to bearer. * Dishonored notes – when promissory note matures and is not paid. This should be removed from the notes receivable account and transferred to accounts receivable at an amount including, if any, interest and other charges. * Discounting of Notes – the payee may obtain cash before maturity date at a bank or other financing company. The payee then becomes the endorser; the bank or other financing company becomes the endorsee.

Sample Promissory Note

Elements of the Notes
* Maker – JaeyRa Jo
* Payee – Charmcharm
* Principal (Face) – P100,000. It is the amount appearing on the face of the note. It represents the amount borrowed * Interest Rate – 12%. Annual interest rate of interest appearing on the face of the note which will be the basis of interest charges to the maker. It is usually stated at an annual rate * Interest - amount of interest for the full term of the note

Interest (I) = Principal x Rate x Time (P x R x T)
Interest (I) = P100,000 x 12% x 90/360
= P3,000

* Term – 90 days. It is the period of time during which interest should be computed. It extends from the issue date to the maturity date of the note * Issue Date – May 1, 2009. It is the date when the note was signed and issued * Maturity Date – July 30, 2009. It is the date when maturity value should be paid and is computed as follows:

Days remaining in May (31 – 1)30
Days in June30
Days for July30 (maturity date)
Term of Note90

* Maturity Value – amount due on the note at the date of maturity

Maturity Value (MV) = Principal plus Interest (P + I)
Maturity Value (MV) = P100,000 + P3,000
= P103,000
Journal Entries

May 1
Notes Receivable
P100,000

Cash

P100,000

To record receipt of 90-day note.

31
Interest Receivable
1,000

Interest Income (100,000 x 12% x 30/360)

1,000

To record accrued interest.

June 30
Interest Receivable
1,000

Interest Income (100,000 x 12% x 30/360)

1,000

To record accrued interest.

July 30
Interest Receivable
1,000

Interest Income (100,000 x 12% x 30/360)

1,000

To record accrued interest.

Cash
103,000

Notes Receivable

100,000

Interest Receivable

3,000

To record collection of Notes plus interest

Assume that the maker dishonored the note on July 30. The maker is still liable to pay the maturity value including protest fees and charges that may accrue after maturity date. July 30
Accounts Receivable
P103,000

Notes Receivable

P100,000

Interest Receivable

3,000

To record Notes receivable dishonored

DISCOUNTING OF NOTES
- The payee may obtain cash before maturity date at a bank or other financing company. The payee then becomes the endorser; the bank or other financing company becomes the endorsee. It is a convenient way for a business or individual to cash in on a note at any time before maturity.

- When a note is discounted, the original payee receives the proceeds of the discounted note. The bank – new payee – will receive the maturity value of the note at maturity. To receive cash on the note before maturity, the seller is willing to accept a significantly discounted price.

- Notes are generally discounted with recourse. This means that the entity discounting the note guarantees payment if the maker of the note defaults or dishonors payment.

Entry for Notes Discounted with recourse (if the problem is silent)
Cashxxx
Notes Receivable Discountedxxx

Entry for Notes Discounted...
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