Heintz & Parry
Chapter
20thth Edition
17
Accounting
Accounting for
for Notes
Notes
and
and Interest
Interest
College
College Accounting
Accounting
PROMISSORY NOTE
1
• A written promise to pay a specific sum at
a definite future date
Describe a
promissory note.
• Also called a “note”
• Often used when credit is extended for 60
days or more, or when large amounts of
money are involved
PROMISSORY NOTE
$ 2,500.00
PRINCIPAL
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PROMISSORY NOTE
$ 2,500.00
Date of
the note
June 9, 20 - -
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PROMISSORY NOTE
$ 2,500.00
Ninety Days
of
Term te
o
the n
AFTER DATE
June 9, 20 - I
PROMISE TO PAY TO
PROMISSORY NOTE
$ 2,500.00
Ninety Days
June 9, 20 - AFTER DATE
I
PROMISE TO PAY TO
PAYEE
THE ORDER OF Central Bank
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PROMISSORY NOTE
$ 2,500.00
Ninety Days
June 9, 20 - AFTER DATE
I
PROMISE TO PAY TO
THE ORDER OF Central Bank
PROMISSORY NOTE
$ 2,500.00
Ninety Days
June 9, 20 - AFTER DATE
I
PROMISE TO PAY TO
THE ORDER OF Central Bank
Two Thousand Five Hundred and 00/100
Two Thousand Five Hundred and 00/100
PAYABLE AT Central Bank
PAYABLE AT Central Bank
WITH INTEREST AT 9% per Annum from Date
Notes may be
interest bearing or
non-interest bearing.
WITH INTEREST AT 9% per Annum from Date
INTE
REST
R AT E
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No. 2307 Due Sept. 7, 20--
MATURITY
DATE
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PROMISSORY NOTE
2
$ 2,500.00
Ninety Days
June 9, 20 - AFTER DATE
I
PROMISE TO PAY TO
THE ORDER OF Central Bank
Two Thousand Five Hundred and 00/100
PAYABLE AT Central Bank
WITH INTEREST AT 9% per Annum from Date
No. 2307 Due Sept. 7, 20--
MAKER
OF NOTE
Sarah Morney
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Calculate interest on and
determine the due date of
promissory notes.
TERM OF THE NOTE
TERM OF THE NOTE
• The months or days from the date of issue
to the date of maturity
• Used to calculate TIME:
– The term of the note stated as a
fraction of a year
• Note: It is common to use 360 days as a
year
When the term of note is
expressed as months,
TIME is calculated in months.
EXAMPLE: The note signed by Sarah Mornay
is dated June 9, 20-- and is due in 90 days.
30
STEP #1
Start with the month
the note was issued.
COMPUTING THE DUE DATE
EXAMPLE: The note signed by Sarah Mornay
is dated June 9, 20-- and is due in 90 days.
Days in June
Deduct date of note (June 9)
Days remaining in June
30
9
21
Subtract the date the note was issued
(do not count the date of issuance).
COMPUTING THE DUE DATE
EXAMPLE: The note signed by Sarah Mornay
is dated June 9, 20-- and is due in 90 days.
Days in June
Deduct date of note (June 9)
Days remaining in June
Add: Days in July
Days in August
• Note: It is common to use 360 days as a
year
When the term of the note is expressed
as days, the TIME is calculated using
the exact number of days.
COMPUTING THE DUE DATE
Days in June
• The months or days from the date of issue
to the date of maturity
• Used to calculate TIME:
– The term of the note stated as a
fraction of a year
30
9
21
31
31
STEP #2
Add to the result of step #1 the number of
days in as many months as possible without
exceeding the time of the note.
COMPUTING THE DUE DATE
EXAMPLE: The note signed by Sarah Mornay
is dated June 9, 20-- and is due in 90 days.
Days in June
Deduct date of note (June 9)
Days remaining in June
Add: Days in July
Days in August
By the end of August,
83 days of the note have past.
30
9
21
31
31
COMPUTING THE DUE DATE
EXAMPLE: The note signed by Sarah Mornay
is dated June 9, 20-- and is due in 90 days.
Days in June
Deduct date of note (June 9)
Days remaining in June
Add: Days in July
Days in August
30
9
21
31
31
STEP #3
Subtract the result of step #2
from the time of the note (90 – 83).
COMPUTING THE DUE DATE
EXAMPLE: The note signed by Sarah Mornay
is dated June 9, 20-- and is due in 90 days.
Days in June
Deduct date of note (June 9)
Days remaining in June
Add: Days in July
Days in August
Maturity date, September 7
The 90th day (Sept. 7th) is
called the maturity date.
30
9
21
31
31
7
CALCULATING INTEREST
EXAMPLE: The note signed by Sarah Mornay
has a principal of $2,500, an annual interest
rate of 9%, and is due in 90 days.
FORMULA:
PRINCIPAL × RATE × TIME
$2,500.00 × 9% × 90/360
$56.25
interest
COMPUTING THE DUE DATE
EXAMPLE: The note signed by Sarah Mornay
is dated June 9, 20-- and is due in 90 days.
Days in June
Deduct date of note (June 9)
Days remaining in June
Add: Days in July
Days in August
30
9
21
31
31
The result is the date of the
month the note is due.
COMPUTING THE DUE DATE
EXAMPLE: The note signed by Sarah Mornay
is dated June 9, 20-- and is due in 90 days.
Days in June
Deduct date of note (June 9)
Days remaining in June
Add: Days in July
Days in August
Maturity date, September 7
Total time in days
30
9
21
31
31
7
90
CALCULATING INTEREST
EXAMPLE: A $2,000, 8% note due in 3 months
FORMULA:
PRINCIPAL ×
$2,000.00
×
RATE ×
8% ×
$40
interest
TIME
3/12
NOTES RECEIVABLE
TRANSACTIONS
3
• Seven types:
– Note received from a customer in
exchange for assets sold
– Note received from a customer to
extend time for payment of an account
– Note collected at maturity
– Note renewed at maturity
– Note discounted before maturity
– Note dishonored
– Collection of dishonored note
Account for notes
receivable transactions and
accrued interest.
GENERAL JOURNAL
NOTE RECEIVED IN EXCHANGE FOR
ASSETS
EXAMPLE: On June 1, Linesch Hardware Co.
sells an industrial mower to Williams
Manufacturing for $8,500 in exchange for a
180-day, 9% note signed by Williams.
1
2
3
4
DATE
DESCRIPTION
20-June 1 Notes Receivable
PR DEBIT CREDIT
8,500
Sales
8,500
Received note for
merchandise sale
5
6
7
8
9
10
11
GENERAL JOURNAL
1
2
3
4
5
DATE
DESCRIPTION
20-Nov. 28 Cash
8,882.50
6
7
8
9
10
11
Assume 180 days later, Williams
Manufacturing pays the maturity value
of the note (principal plus interest).
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NOTE RECEIVED TO EXTEND TIME
FOR PAYMENT
PR DEBIT CREDIT
Notes Receivable
Interest Revenue
Received principal and
interest
This is simply a sale in which
the buyer signs a note (a promise to pay).
Note that the seller will receive interest
as well as principal.
8,500.00
382.50
EXAMPLE: Accounts receivable customer,
Michael Putter, owes $2,000 to Linesch
Hardware Co. To settle this account, Putter
signs a 90-day, 10% note dated June 8.
Why would we want to
accept this note?
GENERAL JOURNAL
NOTE RECEIVED TO EXTEND TIME
FOR PAYMENT
EXAMPLE: Accounts receivable customer,
Michael Putter, owes $2,000 to Linesch
Hardware Co. To settle this account, Putter
signs a 90-day, 10% note dated June 8.
Two reasons to accept this note:
1. The note is a formal, written promise to
pay
– Can be converted to cash at a bank if
necessary
2. The note is likely to bear interest
1
2
3
4
2,000
Accts. Receivable/M. Putter
Received note to settle
account
2,000
6
7
8
9
10
11
Mr. Putter’s balance is removed
from Accounts Receivable and
placed into Notes Receivable.
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GENERAL JOURNAL
1
2
3
4
5
Let’s look at
the journal
entry!
PR DEBIT CREDIT
5
NOTE RECEIVED TO EXTEND TIME
FOR PAYMENT
EXAMPLE: What if accounts receivable
customer, Michael Putter, gives a check for
$250 and a note for $1,750 instead?
DATE
DESCRIPTION
20-June 8 Notes Receivable
DATE
DESCRIPTION
20-June 8 Cash
PR DEBIT CREDIT
250
Notes Receivable
1,750
Accts. Receivable/M. Putter
Received cash and note
2,000
to settle account
6
7
8
9
10
11
NOTE COLLECTED AT MATURITY
• When a note receivable matures, it may
be collected:
– By the payee
– By the bank named in the note
– By a bank where it was left for
collection
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NOTE COLLECTED AT MATURITY
EXAMPLE: On September 6 (the due date),
Putter pays the principal and interest on the
note.
Principal of note
Interest
$2,000
50
$2,000 × 10% × 90/360
GENERAL JOURNAL
NOTE COLLECTED AT MATURITY
EXAMPLE: On September 6 (the due date),
Putter pays the principal and interest on the
note.
Principal of note
Interest
$2,000
50
Maturity value
$2,050
1
2
3
4
5
DATE
DESCRIPTION
20-Sept. 6 Cash
PR DEBIT CREDIT
2,050
Notes Receivable
2,000
Interest Revenue
Received payment of note
with interest
50
6
7
8
9
10
11
GENERAL JOURNAL
NOTE COLLECTED AT MATURITY
EXAMPLE: What if the note had been left at
Planet Bank for collection instead?
Planet Bank would collect the maturity
value from Putter, subtract out a service
charge, and deposit the remainder in
Linesch’s account.
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1
2
3
4
5
DATE
DESCRIPTION
20-Sept. 6 Cash
PR DEBIT CREDIT
2,040
Collection Expense
Notes Receivable
10
2,000
Interest Revenue
6
Received payment of note
with interest less collection
7
fee
50
8
9
10
11
GENERAL JOURNAL
NOTE RENEWED AT MATURITY
EXAMPLE: What if Mr. Putter had been able to
pay the interest due on the note and asked to
renew the note?
Linesch Hardware Co. would collect the
interest, and accept a new note to replace
the original note.
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1
2
3
4
5
6
DATE
DESCRIPTION
20-Sept. 6 Cash
Notes Receivable (new note)
Notes Receivable (old note)
PR DEBIT CREDIT
50
2,000
Interest Revenue
Received new note plus
interest on old note
7
8
9
10
11
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2,000
50
GENERAL JOURNAL
NOTE RENEWED AT MATURITY
EXAMPLE: What if Mr. Putter had been able to
pay the interest due on the note, pay $500 on
the principal, and asked to renew the balance
of the note?
1
2
3
4
5
Linesch Hardware Co. would collect the
interest and partial payment, and accept a
new note to replace the original note.
6
7
DATE
DESCRIPTION
20-Sept. 6 Cash
PR DEBIT CREDIT
550
Notes Receivable (new note)
Notes Receivable (old note)
1,500
2,000
Interest Revenue
Received new note plus
50
partial payment and interest
on old note
8
9
10
11
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NOTE DISCOUNTED BEFORE
MATURITY
NOTE DISCOUNTED BEFORE
MATURITY
• If a business needs cash before the due
date of a note, it can endorse the note and
transfer it to a bank
– The bank charges an interest fee called
a “bank discount”
EXAMPLE: Assume the $2,000, 10%, 90-day
note from Putter dated June 8 is discounted
at the bank on July 8 at a rate of 12%.
• For the time between the date of
discounting and the due date of the note
– The difference between the maturity
value and the bank discount is called
the “proceeds”
NOTE DISCOUNTED BEFORE
MATURITY
EXAMPLE: Assume the $2,000, 10%, 90-day
note from Putter dated June 8 is discounted
at the bank on July 8 at a rate of 12%.
Step #1 Compute the maturity value of the note.
Face
+
Interest
$2,000
+
$50
= Maturity Value
=
$2,050
Calculating
the discount and
proceeds is a fourstep process.
NOTE DISCOUNTED BEFORE
MATURITY
EXAMPLE: Assume the $2,000, 10%, 90-day
note from Putter dated June 8 is discounted at
the bank on July 8 at a rate of 12%.
Step #2 Compute the number of days in the
discount period—from the discount date to the
due date.
Days in July
Less: Discount date
31
8
The discount date is not
counted in the discount period.
NOTE DISCOUNTED BEFORE
MATURITY
NOTE DISCOUNTED BEFORE
MATURITY
EXAMPLE: Assume the $2,000, 10%, 90-day
note from Putter dated June 8 is discounted at
the bank on July 8 at a rate of 12%.
EXAMPLE: Assume the $2,000, 10%, 90-day
note from Putter dated June 8 is discounted at
the bank on July 8 at a rate of 12%.
Step #3 Compute the discount amount.
Step #2 Compute the number of days in the
discount period—from the discount date to
the due date.
Days in July
Less: Discount date
Remaining days in July
Plus days in August
Plus due date (Sept.)
Days in discount period
Maturity Discount Discount Discount
×
×
=
Value
Period
Amount
Rate
31
8
23
31
6
60
$2,050
EXAMPLE: Assume the $2,000, 10%, 90-day
note from Putter dated June 8 is discounted at
the bank on July 8 at a rate of 12%.
Step #4 Compute the proceeds.
$2,050
–
$41
1
2
3
4
6
=
7
$2,009
PR DEBIT CREDIT
Interest Expense
Notes Receivable
1,992
8
Discounted note receivable
The difference represents
interest expense.
8
9
10
11
$41
DATE
DESCRIPTION
20-July 8 Cash
PR DEBIT CREDIT
2,009
Notes Receivable
2,000
Interest Revenue
Discounted note receivable
What if the proceeds are less than
the face value of the note?
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NOTE DISHONORED
5
7
=
10
GENERAL JOURNAL
6
60/360
8
9
11
DATE
DESCRIPTION
20-July 8 Cash
×
5
= Proceeds
Let’s journalize the
discounting of this note.
1
2
3
4
12%
GENERAL JOURNAL
NOTE DISCOUNTED BEFORE
MATURITY
Maturity
Discount
– Amount
Value
×
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2,000
• The maker of the note does not pay or
renew it at maturity
• The maker is still liable
• The note loses its legal status
• The payee transfers the amount due from
Notes Receivable to Accounts Receivable
9
GENERAL JOURNAL
NOTE DISHONORED
EXAMPLE: Putter dishonors the $2,000, 10%,
90-day note.
Interest, although it has not
been paid by the maker,
is recognized as earned
by the payee.
1
2
3
4
6
7
10
11
2,050
2,000
Interest Revenue
50
Note receivable dishonored
The entire maturity value is
debited to Accounts Receivable.
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GENERAL JOURNAL
NOTE DISHONORED
The payee then attempts to
recover the maturity value
PLUS the bank fee
from the maker.
PR DEBIT CREDIT
5
8
9
EXAMPLE: If Putter’s note had been
discounted at the bank and then was
dishonored by the maker, the bank will
require the PAYEE to pay the principal,
interest, and bank fees.
DATE
DESCRIPTION
20-Sept. 6 Accounts Receivable/Putter
Notes Receivable
1
2
3
4
DATE
DESCRIPTION
20-Sept. 6 Accounts Receivable/Putter
PR DEBIT CREDIT
2,060
Cash
2,060
Paid bank for dishonored
note, including a $10 bank fee.
5
6
7
8
9
10
11
GENERAL JOURNAL
COLLECTION OF A DISHONORED
NOTE
EXAMPLE: On October 16, the payee collects
from Putter after the note had been
discounted and dishonored.
1
2
3
4
5
The maker pays the maturity
value, bank fee, and additional
interest at 10% for the period since
dishonoring the note.
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6
7
8
9
10
11
DATE
DESCRIPTION
20-Oct. 16 Cash
PR DEBIT CREDIT
2,082.89
Principal + Interest+ Bank Fee
$2,000 + $50 + $10 = $2,060
$2,060 × 10% × 40/360 = $22.89
$2,060 + $22.89 = $2,082.89
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NOTES RECEIVABLE REGISTER
GENERAL JOURNAL
1
2
3
4
DATE
DESCRIPTION
20-Oct. 16 Cash
PR DEBIT CREDIT
2,082.89
Accounts Receivable
Interest Revenue
Collected dishonored note
with interest
5
2,060.00
22.89
6
May
2 S. Alpart
19 L. Shein
June 20 J. Slaw
Interest
Time Due Date Amount Rate Amount
60 days June 3
60 days June 21
400.00 8%
600.00 9%
5.33
9.00
30 days June 1
90 days Aug. 17
700.00 9%
800.00 9%
5.25
18.00
60 days Aug. 19
500.00 9%
7.50
When a business has many notes,
it may keep a notes receivable
register.
7
8
9
10
11
Date
Maker
Rcvd.
20-Apr. 4 L. Peters
21 J. Slaw
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NOTES RECEIVABLE REGISTER
Interest
Rate Amount
8%
5.33
9%
9.00
9%
5.25
9%
18.00
9%
Discounted
Bank
Date
Date
Collected
Remarks
June 3
June 20 Renewal for $500
June 1 Sent for collection 5/30
7.50
ACCRUED INTEREST RECEIVABLE
• Revenue should be recognized when it is
earned
– Not always practical
• Interest is earned day by day
Renewal of 4/21 note
– It is common for interest to be
recognized when the note is due
• If the note is received and due within a
single accounting period
– If the note is received in one period and
due in the next, accrued interest must
be recorded at the end of the period
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ACCRUED INTEREST RECEIVABLE
ACCRUED INTEREST RECEIVABLE
EXAMPLE: The fiscal year ends on June 30.
Two notes from the notes receivable register
remain outstanding. Accrued interest on these
notes must be calculated and recognized.
EXAMPLE: The fiscal year ends on June 30.
Two notes from the notes receivable register
remain outstanding. Accrued interest on these
notes must be calculated and recognized.
Principal
$800.00
Date of
Issue
May 19
Rate of
Interest
9%
Days from
Issue Date
to June 30
42
$800.00 × 9% × 42/360
Accrued
Interest
June 30
$8.40
Principal
$800.00
$500.00
Date of
Issue
May 19
June 20
Rate of
Interest
9%
9%
Days from
Issue Date
to June 30
42
10
Accrued
Interest
June 30
$8.40
1.25
$9.65
GENERAL JOURNAL
1
2
3
4
DATE
DESCRIPTION
20-June 30 Accrued Interest Receivable
PR DEBIT CREDIT
Interest Revenue
Interest accrued on notes
receivable
9.65
4
9.65
Account for notes
payable transactions
and accrued interest.
5
6
7
8
9
10
11
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NOTES PAYABLE TRANSACTIONS
• Five types:
– Note issued to a supplier in exchange
for assets purchased
– Note issued to a supplier to extend time
for payment of an account
– Note issued as security for cash loan
– Note paid at maturity
– Note renewed at maturity
GENERAL JOURNAL
1
2
3
4
DATE
DESCRIPTION
20-June 1 Purchases
EXAMPLE: On June 1, Linesch Hardware Co.
purchases a truckload of trees and shrubs
from Evergreen Enterprises and signs a
$4,000, 90-day, 9% note in exchange.
The maker would record
this as a note payable.
NOTE ISSUED TO EXTEND TIME FOR
PAYMENT
PR DEBIT CREDIT
4,000
Notes Payable
Issued note for inventory
purchase
5
6
7
8
9
10
11
NOTE ISSUED IN EXCHANGE FOR
ASSETS
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4,000
EXAMPLE: $700 is owed to Bella & Co. on
June 11. Bella & Co. agrees to accept a $700,
90-day, 10% note dated June 11.
GENERAL JOURNAL
1
2
3
4
NOTE ISSUED TO EXTEND TIME FOR
PAYMENT
DATE
DESCRIPTION
PR DEBIT CREDIT
20-June 11 Accounts Payable/Bella & Co.
700
Notes Payable
Issued note to settle account
EXAMPLE: A partial payment of $200 is made
to Bella & Co. on June 11. A note is issued to
Bella & Co. for the remaining $500.
700
5
6
7
8
9
10
11
Let’s look at
the journal
entry!
The balance owed to Bella & Co.
is removed from Accounts Payable and
placed into Notes Payable.
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GENERAL JOURNAL
1
2
3
4
5
NOTE ISSUED AS SECURITY FOR
CASH LOAN
DATE
DESCRIPTION
PR DEBIT CREDIT
20-June 11 Accounts Payable/Bella & Co.
700
Cash
200
Notes Payable
Made partial payment and
500
•
•
issued note to settle account
•
6
7
8
9
Two types:
Interest-bearing notes
– The face value of the note is received in
cash
– The maker pays face value plus interest at
maturity
Non-interest-bearing notes
– Interest is deducted in advance, called
“discounting”
– Face value minus interest is received in
cash
– The maker pays face value at maturity
10
11
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GENERAL JOURNAL
INTEREST-BEARING NOTES
EXAMPLE: Borrowed $6,000 on June 16 from
Planet Bank on a 60-day, 10.5% note.
Let’s look at
the journal
entry!
1
2
3
4
DATE
DESCRIPTION
20-June 16 Cash
PR DEBIT CREDIT
6,000
Notes Payable
Issued note for bank loan
5
6
7
8
9
10
11
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6,000
GENERAL JOURNAL
NON-INTEREST-BEARING NOTES
EXAMPLE: A non-interest-bearing, 60-day note
was issued for $6,000 on June 16. The bank
discounts at the rate of 10.5%.
The maker will not receive
the whole $6,000.
(10.5% × $6,000 × 60/360 = $105 discount;
$6,000 – $105 = $5,895)
1
2
3
4
5
6
1
2
3
4
DATE
DESCRIPTION
20-June 16 Cash
5,895
The maker receives the
proceeds but promised to
pay the maturity value ($6,000).
8
9
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Maker
Maker of
of the
the Note
Note Balance
Balance Sheet
Sheet
June
June 30,
30, 20-20--
PR DEBIT CREDIT
105
Notes Payable
Issued note for bank loan
Assets
Current assets
5,895
Discount on Notes Payable
PR DEBIT CREDIT
7
10
11
GENERAL JOURNAL
DATE
DESCRIPTION
20-June 16 Cash
6,000
5
Liabilities
Current liabilities
Notes payable
Less: Discount on notes payable
$6,000
105
$5,895
6
The balance sheet shows the
discount on notes payable
as a reduction from the
notes payable account.
7
8
9
10
11
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STATED vs. EFFECTIVE INTEREST
RATE
INTEREST-BEARING
NOTE
NON-INTERESTBEARING NOTE
$105/$6,000 = 1.75%
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
STATED vs. EFFECTIVE INTEREST
RATE
INTEREST-BEARING
NOTE
$105/$6,000 = 1.75%
× 6
10.5%
Interest rate for 60 days
Effective rate
NON-INTERESTBEARING NOTE
STATED vs. EFFECTIVE INTEREST
RATE
INTEREST-BEARING
NOTE
STATED vs. EFFECTIVE INTEREST
RATE
NON-INTERESTBEARING NOTE
INTEREST-BEARING
NOTE
$105/$6,000 = 1.75%
× 6
10.5%
$105/$6,000 = 1.75% $105/$5,895 = 1.781%
× 6
× 6
10.686%
10.5%
Interest-bearing notes:
Effective rate = Stated rate
Non-interest-bearing notes:
Effective rate ≠ Stated rate
GENERAL JOURNAL
NOTE PAID AT MATURITY
EXAMPLE: The interest-bearing note is paid
at maturity.
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2
3
4
5
$6,000 × 10.5% × 60/360 = $105 interest
$6,000 + $105 = $6,105 paid
NON-INTERESTBEARING NOTE
DATE
DESCRIPTION
20-Aug. 15 Notes Payable
PR DEBIT CREDIT
6,000
Interest Expense
105
Cash
Paid note with interest at
6,105
maturity
6
7
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9
10
11
GENERAL JOURNAL
NOTE PAID AT MATURITY
Now let’s look at the non-interest-bearing
note at maturity.
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2
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5
A $6,000 maturity value is paid to the
payee. Discount on Notes Payable
becomes Interest Expense.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
DATE
DESCRIPTION
20-Aug. 15 Notes Payable
Interest Expense
Cash
Discount on Notes Payable
Paid note at maturity
PR DEBIT CREDIT
6,000
105
6
7
8
9
10
11
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
6,000
105
GENERAL JOURNAL
NOTE RENEWED AT MATURITY
EXAMPLE: The maker pays only $1,000 plus
the $105 interest on the $6,000 note and
signs a new $5,000, 60-day, 10.5% note.
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2
3
4
5
The old note is removed,
interest expense of $105 is recognized,
cash is reduced, and a new note
is recorded.
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7
DATE
DESCRIPTION
20-Aug. 15 Notes Payable (old note)
20--
Apr. 14 L. Knoop
May 13 Apex Bank
June 2 S. Bront
1,105
5,000
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
NOTES PAYABLE REGISTER
Interest
Time Due Date Amount Rate Amount
60 days June 13 2,000.00 9%
90 days Aug. 11 8,000.00 10%
30 days July 2 1,500.00 11%
105
principal on old note and
issued new note
NOTES PAYABLE REGISTER
Maker
6,000
Interest Expense
Cash
Notes Payable (new note)
Paid interest and part of
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9
10
11
Date
Issued
PR DEBIT CREDIT
Amount
Rate
2,000.00 9%
8,000.00 10%
1,500.00 11%
30.00
200.00
13.75
Date
Interest
Remarks
Paid
Amount
30.00 June 13 Settled 2/14 invoice
200.00
13.75
Settled 4/2 invoice
Multiple notes are recorded
in a notes payable register.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
GENERAL JOURNAL
ACCRUED INTEREST PAYABLE
EXAMPLE: Issued a $900, 60-day, 10%
note on May 31. June 30 is the company’s
fiscal year end.
An adjusting entry is needed
on June 30 to record the interest
accrued on the note from
May 31 to June 30.
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2
3
4
DATE
DESCRIPTION
20-June 30 Interest Expense
PR DEBIT CREDIT
7.50
Accrued Interest Payable
Interest accrued on note
payable
5
6
7
8
9
10
11
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
7.50
GENERAL JOURNAL
ACCRUED INTEREST PAYABLE
EXAMPLE: If instead it was a $900, 60-day,
non-interest-bearing note that was
discounted at the bank at 10%...
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2
3
4
7
8
9
GENERAL JOURNAL
4
Discount on Notes Payable
PR DEBIT CREDIT
885
15
Notes Payable
Issued note for bank loan
900
5
6
7
8
9
June 30 Interest Expense
Discount on Notes Payable
7.50
Interest accrued on note
payable
10
11
Discount on Notes Payable
Notes Payable
Issued note for bank loan
885
15
6
10
11
DATE
DESCRIPTION
20-May 31 Cash
PR DEBIT CREDIT
5
An adjusting entry is needed
on June 30 to move the interest
for the period (May 31 to June 30)
from Discount on Notes Payable
to Interest Expense.
1
2
3
DATE
DESCRIPTION
20-May 31 Cash
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
7.50
Journal entry to record
the note’s issuance
©2011 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
900