Promissory notes are negotiable instruments as are

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Promissory notes are negotiable instruments (as are checks), which means that they can be transferred to another party by endorsement. Companies frequently accept notes receivable from customers who need to extend the payment of an account receivable. They often require such notes from high-risk customers. In some industries (such as the pleasure boat industry), all credit sales are supported by notes.The majority of notes originate from loans. The basic issues in accounting for notes receivable are the same as those for ac- counts receivable: 1. Recognizing notes receivable. 2. Valuing notes receivable. 3. Disposing of notes receivable. On the following pages, we will look at these issues. Before we do, we need to consider two issues that did not apply to accounts receivable: maturity date and computing interest. Determining the Maturity Date When the life of a note is expressed in terms of months, you find the date when it matures by counting the months from the date of issue. For exam- ple, the maturity date of a three-month note dated May 1 is August 1. A note drawn on the last day of a month matures on the last day of a subse- quent month.That is, a July 31 note due in two months matures on September 30. When the due date is stated in terms of days, you need to count the exact num- ber of days to determine the maturity date. In counting, omit the date the note is issued but include the due date . For example, the maturity date of a 60-day note dated July 17 is September 15, computed as follows. “On demand I promise to pay...” On demand On a stated date At the end of a stated period of time “On July 23, 2010, I promise to pay...” Wilma Co. Wilma Co. Wilma Co. “One year from now I promise to pay...” Illustration 9-12 Maturity date of different notes Illustration 9-12 shows three ways of stating the maturity date of a promissory note. Compute the maturity date of and interest on notes receivable. S T U D Y O B J E C T I V E 5 PDF Watermark Remover DEMO : Purchase from to remove the watermark
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Notes Receivable 411 The computation above assumed 360 days for the length of the year. Financial instruments actually use 365 days. In order to simplify calculations in our illustra- tions, we have assumed 360 days. For homework problems, assume 360 days . Recognizing Notes Receivable To illustrate the basic entry for notes receivable, we will use the $1,000, two-month, 12% promissory note on page 409. Assuming that Calhoun Company wrote the note to settle an open account, Wilma Company makes the following entry for the receipt of the note. May 1 Notes Receivable 1,000 Accounts Receivable—Calhoun Company 1,000 (To record acceptance of Calhoun Company note) The company records the note receivable at its face value , the amount shown on the face of the note. No interest revenue is reported when the note is accepted, because the revenue recognition principle does not recognize revenue until earned. Interest is earned (accrued) as time passes.
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