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Unformatted text preview: -8 Note disclosure of accounts receivable 8-32 SO 3 Describe the methods used to account for bad debts. 8-33 Notes Receivable Notes Receivable Companies may grant credit in exchange for a promissory note. A promissory note is a written promise to pay a specified amount of money on demand or at a definite time. Promissory notes may be used 1. when individuals and companies lend or borrow money, 2. when amount of transaction and credit period exceed normal limits, or 3. in settlement of accounts receivable. 8-34 Notes Receivable Notes Receivable To the Payee, the promissory note is a note receivable. To the Maker, the promissory note is a note payable. Illustration 8-9 8-35 Notes Receivable Notes Receivable Determining the Maturity Date Note expressed in terms of Months Days Computing Interest Illustration 8-10 8-36 SO 4 Compute the interest on notes receivable. Notes Receivable Notes Receivable Computing Interest When counting days, omit the date the note is issued, but include the due date. Illustration 8-11 8-37 SO 4 Compute the interest on notes receivable. Notes Receivable Notes Receivable Recognizing Notes Receivable Illustration: Brent Company wrote a $1,000, two-month, 8% promissory note dated May 1, to settle an open account. Prepare entry would Wilma Company makes for the receipt of the note. May 1 Notes receivable 1,000 Accounts receivable 8-38 1,000 SO 4 Compute the interest on notes receivable. Notes Receivable Notes Receivable Valuing Notes Receivable Estimation of cash realizable value and bad debts expense are done similarly to accounts receivable. 8-39 Report short-term notes receivable at their cash (net) realizable value. Allowance for Doubtful Accounts is used. SO 4 Compute the interest on notes receivable. 8-40 Notes Receivable Notes Receivable Disposing of Notes Receivable 1. Notes may be held to their maturity date. 2. Maker may default and payee must make an adjustment to the account. 3. Holder speeds up conversion to cash by selling the note receivable. 8-41 SO 5 Describe the entries to record the disposition of notes receivable. Notes Receivable Notes Receivable Disposing of Notes Receivable Honor of Notes Receivable A note is honored when its maker pays it in full at its maturity date. Dishonor of Notes Receivable A dishonored note is not paid in full at maturity. Dishonored note receivable is no longer negotiable. 8-42 SO 5 Describe the entries to record the disposition of notes receivable. Notes Receivable Notes Receivable Honor of Notes Receivable Illustration: Wolder Co. lends Higley Inc. $10,000 on June 1, accepting a five-month, 9% interest note. If Wolder presents the note to Higley Inc. on November 1, the maturity date, Wolder’s entry to record the collection is: Nov. 1 Cash 10,375 Notes receivable 10,000 Interest revenue 375 ($10,000 x 9% x 5/12 = $ 375) 8-43 SO 5 Describe the entries to record the disposition of notes receivable. Notes Receivable Notes Receivable Accrual of Interest Illustration: Suppose instead...
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