ReceivablesNotes Receivable

and Interest Revenue

ReceivablesPremise:

ReceivablesPremise:When you extend credit to customers…

ReceivablesPremise:When you extend credit to customers…you know some customers won’t pay.

ReceivablesPremise:When you extend credit to customers…you know some customers won’t pay.

Solutions:

ReceivablesPremise:When you extend credit to customers…you know some customers won’t pay.

Solutions:I. Notes Receivable and Interest

ReceivablesPremise:When you extend credit to customers…you know some customers won’t pay.

Solutions:I. Notes Receivable and InterestII. Uncollectible Accounts

ReceivablesPremise:When you extend credit to customers…you know some customers won’t pay.

Solutions:I. Notes Receivable and InterestII. Uncollectible Accounts

Lecture

ReceivablesPremise:When you extend credit to customers…you know some customers won’t pay.

Solutions:I. Notes Receivable and InterestII. Uncollectible Accounts

Today

Why Notes instead of Accounts Receivable?

charge (earn) intereststronger legal claimmore liquid -- may be converted

to cash selling A/R called “factoring” selling Notes Receivable called

“discounting”

Calculating Interest

rate is an annual ratetime expressed as a portion of

year government uses 365 many banks use 360 use 360 in homework / class

P x R x T

Short-cut “6% - 60 day” Method

$844. x 6% x 60 / 360 = ??? $844. = ???

Short-cut “6% - 60 day” Method$844. x 6% x 60 / 360 = ???

$844. = ???$844. = $8.44

Short-cut “6% - 60 day” Method

$844. x 6% x 60 / 360 = ??? $844. = $8.44

You try . . .

Short-cut “6% - 60 day” Method

$844. x 6% x 60 / 360 = ??? $844. = $8.44

You try . . . 6% for 30 days =

Short-cut “6% - 60 day” Method

$844. x 6% x 60 / 360 = ??? $844. = $8.44

You try . . . 6% for 30 days = $4.22

Short-cut “6% - 60 day” Method

$844. x 6% x 60 / 360 = ??? $844. = $8.44

You try . . . 6% for 30 days = $4.2212% for 60 days =

Short-cut “6% - 60 day” Method

$844. x 6% x 60 / 360 = ??? $844. = $8.44

You try . . . 6% for 30 days = $4.2212% for 60 days = $16.88

Determining the (Exact) Due Date

• Learn the number of days in each month• poem method• knuckle method

• counting days if term of note• stated in days• stated in months

Example of Counting DaysA 60-day note dated August 17 is due ________ .

31 - 17

14 + 30

44 + ??

60

The note is due October 16.

Due Date When Stated in Months

RULE: “same day of the month”

Examples of Counting Months

A two-month note dated August 17 is due ______ .October 17

Due Date When Stated in Months

RULE: “same day of the month”

EXCEPTION: how to deal with EOM “last day of month”

Examples of Counting Months

A two-month note dated August 17 is due ______ .October 17

A three-month note dated Nov. 30 is due ______ .February 28

A three-month note dated April 30 is due ______ .July 30

Exercise E9-10page 442

8/16 Sold merchandise to Max Weinberg on account, $4,000.

Date Account Title Ref Debit Credit

4,000SalesAccounts Receivable - MW

4,00016

Should also record reduction in inventory.

Exercise E9-10page 442

Date Account Title Ref Debit Credit

Notes Receivable 15,00015,000Cash

1

11/1 Loaned $15,000 cash to Jorge Perez on a 1-year, 10% note.

What about the interest?

What about the discount?Ever been lost ... … at DisneyWorld? … in a hospital? … in an office building?

11/1

10/31

You are here!

Inte

rest

interest

Exercise E9-10page 442

Date Account Title Ref Debit Credit

Notes Receivable 6,7506,750Sales

1

12/11 Sold goods to Armie Hammer, Inc., receiving a $6,750, 90-day, 8% note.

Should also record reduction in inventory.

Exercise E9-10page 442

8/16 Sold merchandise to Max Weinberg on account, $4,000.

Date Account Title Ref Debit Credit

Accounts Receivable - MW

4,0004,000Sales

16

12/16Received a $4,000, 6-month, 12% note on account from Prentice Berge. Date Account Title Ref Debit Credit

Accounts Receivable - PB4,000

4,000Notes Receivable16

Rememberthisassumption?

Exercise E9-10page 442

8/16 Sold merchandise to Max Weinberg on account, $4,000.

Date Account Title Ref Debit Credit

Accounts Receivable - MW

4,0004,000Sales

16

12/16 Received a $4,000, 6-month, 9% note on account from Max Weinberg. Date Account Title Ref Debit Credit

Accounts Receivable - PB4,000

4,000Notes Receivable16

Exercise E9-10page 442

8/16 Sold merchandise to Max Weinberg on account, $4,000.

Date Account Title Ref Debit Credit

Accounts Receivable – MW

4,0004,000Sales

16

12/16 Received a $4,000, 6-month, 9% note on account from Max Weinberg. Date Account Title Ref Debit Credit

Accounts Receivable - MW

4,0004,000

Notes Receivable16

Exercise E9-10page 442

12/31 Accrued interest revenue on all notes receivable.

Date Account Title Ref Debit Credit

Interest Receivable earnedearnedInterest Revenue

31

How much?

Accrued Interest11/1 $15,000, one year, 10%

12/11 $6,750, 90 days, 8%

12/16 $4,000, 6 months, 9%

Accrued Interest11/1

12/11

12/16

12/31

Accrued Interest11/1

12/11

12/16

12/31

$15,000 x 10% x ??

$15,000 x 10% x ??

Accrued Interest11/1

12/11

12/16

12/31

2 / 12

2 / 12

Accrued Interest11/1

12/11

12/16

12/31

2 / 12

$15,000 x 10% x 2/12

Accrued Interest11/1

12/11

12/16

12/31

$6,750 x 8% x ??

$6,750 x 8% x ??

Accrued Interest11/1

12/11

12/16

12/31

31 - 11 = 20

31 - 11 = 20

Accrued Interest11/1

12/11

12/16

12/31

31 - 11 = 20

$6,750 x 8% x 20/360

Accrued Interest11/1

12/11

12/16

12/31$4,000 x 9% x ??

$4,000 x 9% x ??

Accrued Interest11/1

12/11

12/16

12/31½ month

½ month

Accrued Interest11/1

12/11

12/16

12/31$4,000 x 9% x ??

$4,000 x 9% x .5/12

Now make your

calculations!

Interest Calculations

Principal Rate Time Interest

$15,000 10% 2/12 $250$ 6,750 8% 20/360 30$ 4,000 9% .5/12 15

$345

Interest Calculations

Principal Rate Time Interest

$15,000 10% 2/12 $250$ 6,750 8% 20/360 30$ 4,000 9% .5/12 15

$345

Interest Calculations

Principal Rate Time Interest

$15,000 10% 2/12 $250$ 6,750 8% 20/360 30$ 4,000 9% .5/12 15

$345

Interest Calculations

Principal Rate Time Interest

$15,000 10% 2/12 $250$ 6,750 8% 20/360 30$ 4,000 9% .5/12 15

$295

Exercise E9-8page 442

12/31Accrued interest revenue on all notes receivable.

Date Account Title Ref Debit Credit

Interest Receivable earnedearnedInterest Revenue

31

How much?

Exercise E9-8page 442

12/31Accrued interest revenue on all notes receivable.

Date Account Title Ref Debit Credit

Interest Receivable $295$295Interest Revenue

31

$295

Receivables