chapter 17 accunting

chapter 17 accunting - CHAPTER 17 ACCOUNTING FOR NOTES AND...

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CHAPTER 17 ACCOUNTING FOR NOTES AND INTEREST REVIEW QUESTIONS 1. A note receivable is a written promise to pay and usually includes an interest component. 2. The formula for calculating the interest on notes is: Interest = Principal × Rate × Time. 3. The term of the note is used to calculate time, which is the term of the note stated as a fraction of a year. When the term of the note is specified in months, time is calculated on the basis of months. When the term of the note is specified in days or when the due date is specified in a note, time is computed using the exact number of days from the date of the note to the date of its maturity. 4. Most banks and business firms use 360 days as a year. 5. Businesses generally encounter the following seven types of transactions involving notes receivable: a. Note received from a customer in exchange for assets sold b. Note received from a customer to extend time for payment of an account c. Note collected at maturity d. Note renewed at maturity e. Note discounted before maturity f. Note dishonored g. Collection of dishonored note 6. In discounting a note, the bank uses the maturity value of the note to calculate the discount and uses the days in the discount period as the time period. 7. If the maker of a discounted note does not pay it at maturity, the business that discounted the note must pay the maturity value and any bank fees to the bank. 8. For notes that are received in one period and due in the following period, accrued interest must be recorded at the end of the period. 9. Businesses generally encounter the following five types of transactions involving notes payable: a. Note issued to a supplier in exchange for assets purchased b. Note issued to a supplier to extend time for payment of an account c. Note issued as security for cash loan d. Note paid at maturity e. Note renewed at maturity 10. Bank discounts are calculated by multiplying the maturity value by the discount rate by the discount period. The proceeds are calculated by subtracting the discount amount from the maturity value. 11. Discount on Notes Payable is a contra-liability account and is reported as a deduction from Notes Payable on the balance sheet. 12. The appropriate entry for an interest-bearing note is to debit Interest Expense and credit Accrued Interest Payable. For a non-interest-bearing note, the proper entry is to debit Interest Expense and credit Discount on Notes Payable. 13. Accrued interest receivable is reported as a current asset, and accrued interest payable is reported as a current liability on the balance sheet.
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For ease of presentation, the exercise and problem journal entries do not include explanations. Students should include explanations similar to those illustrated in the chapter.
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This note was uploaded on 03/27/2012 for the course ACCOUNTING 301 taught by Professor Sullivan during the Spring '11 term at Liberty.

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chapter 17 accunting - CHAPTER 17 ACCOUNTING FOR NOTES AND...

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