ReceivablesReceivablesNotes Receivable

and Interest Revenue

ReceivablesReceivablesPremise:

ReceivablesReceivablesPremise:When you extend credit to customers…

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

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

Solutions:

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

Solutions:I. Notes Receivable and Interest

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

Solutions:I. Notes Receivable and InterestII. Uncollectible Accounts

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

Solutions:I. Notes Receivable and InterestII. Uncollectible Accounts Lecture

ReceivablesReceivablesPremise: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. = $8.44You try . . .

6% for 30 days = $4.22

12% for 60 days =

Short-cut “6% - 60 day” Method

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

$844. = $8.44You try . . .

6% for 30 days = $4.22

12% 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 E9-8page 388

8/16 Sold merchandise to Prentice Berge on account, $4,000.

Date Account Title Ref Debit Credit

4,000SalesAccounts Receivable - PB 4,00016

Should also record reduction in inventory.

Exercise E9-8page 388

Date Account Title Ref Debit Credit

Notes Receivable 18,00018,000Cash

1

11/1 Loaned $18,000 cash to Sally Morgan 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 E9-8page 388

Date Account Title Ref Debit Credit

Notes Receivable 6,0006,000Sales

1

12/11Sold goods to Sue Adams, Inc., receiving a $6,000, 90-day, 12% note.

Should also record reduction in inventory.

Exercise E9-8page 388

8/16 Sold merchandise to Prentice Berge on account, $4,000.

Date Account Title Ref Debit Credit

Accounts Receivable - PB 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

Exercise E9-8page 388

12/31Accrued interest revenue on all notes receivable.

Date Account Title Ref Debit Credit

Interest Receivable earnedearnedInterest Revenue

31

How much?

Accrued Interest11/1 $18,000, one year, 10%

12/11 $6,000, 90 days, 12%

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

Accrued Interest11/1

12/11

12/16

12/31

Accrued Interest11/1

12/11

12/16

12/31

$18,000 x 10% x ??

$18,000 x 10% x ??

$6,000 x 12% x ??

$6,000 x 12% x ??

$4,000 x 12% x ??

$4,000 x 12% x ??

Accrued Interest11/1

12/11

12/16

12/31

2 / 12

2 / 12

31 - 11 = 20

31 - 11 = 20

½ month

½ month

Exercise E9-8page 388

12/31Accrued interest revenue on all notes receivable.

Date Account Title Ref Debit Credit

Interest Receivable earnedearnedInterest Revenue

31

How much?

Exercise E9-8page 388

12/31Accrued interest revenue on all notes receivable.

Date Account Title Ref Debit Credit

Interest Receivable $360$360Interest Revenue

31

$360

ReceivablesReceivables