8.3 Notes Receivable

Question 1

what is a promissory note

Answer 1

written promise to pay a specified amount of mooney on demand (whenever the payee demands repayment OR a fixed date in the future)

Question 2

when are promissory notes used

Answer 2

1) when individuals/companies lend/borrow money
2) when the amount of transaction and the length of the credit period exceed normal limits
3) to settle an account receivable where payment cannot be made w/n credit period

Question 3

Who are the parties in a promissory note

Answer 3

1) maker: the party who promise to pay
2) payee: the part who will be paid

Question 4

for the payee what would the amount of money on a note be in an account

Answer 4

asset “note receivable”

Question 5

for the maker of the note, what would the amount of money on a note be

Answer 5

note payable (liability)

Question 6

other names for note recievable/payable

Answer 6

loan receivable/loan payable

Question 7

what does the promissory note detail

Answer 7

names of the maker, payee, principal amount, loan period, interest rate, whether interest is payable monthly or at maturity (the notes due date) along with the principal amount

also could include what collateral is pledged if unpaid note

Question 8

similarities b/w a/r and n/r

Answer 8

1) financial asset
2) credit instrument (promise to pay)
3) reported on sofp at carrying amount
4) related credit losses reported on soi

Question 9

differneces b/w a/r and n/r

Answer 9

A/R:
-informal promise to pay
-bears interest only if past due
-short term (30-60)
-normal classidifed as a current asset

N/R:
-formal/written promise to pay
-bears interest from the date issued
-can be short term or long term
-can be ca or nca

Question 10

how is interest calculated on interest bearing note?

Answer 10

face value of note (principal) x annual interest rate x time in terms of one year = interest income

ex:
principle x ann int rate x #/12= interest income

Question 11

The interest rate specified in a note receivable is an annual rate. It must be pro-rated when calculating interest for periods of less than 12 months.

Answer 11

!!

Question 12

how are n/r recorded on JE WHEN someone cant pay a/r due?

Answer 12

the payee:
DR: N/R principal amount
CR: A/R principal amount

(the amount recorded in the PRINCIPAL AMOUNT!!!! With no interest because interest income is earned w passage of time)

Question 13

how do we do a JE for interest income

Answer 13

1) use the formula for int income=(principal x annual int x #/12)

Dr: interest receivable int income
Cr: intereest income int income

Question 14

what is derecognizing notes receivable

Answer 14

normal process of removing n/r from books when the amount is collected from customers

there are two possibilities:
1) honoured n/r
2) dishonoured n/r

Question 14

why do we an interest recievable account interest or debiting interest income to notes recievable acc?

Answer 14

since N/R is a FORMAL credit instument, RECORDED PRINCIPAL MUST NOTTT change

Question 14

what is the JE when the amount of the note is collected

Answer 14

Dr Cash (n/r + int receivable)
Cr note receiveable (n/r)
Cr interest recievable (int income)

Question 14

how do you do a JE for uncollectible n/r

Answer 14

DR: credit losese
CR: Allowance for expected credit losses

Question 15

what are honoured n/r
-show JE

Answer 15

collected notes receivable

dr Cash
cr N/r
cr Interest/receivable

Question 16

what are dishonoured n/r

Answer 16

note that is not paid in full at maturity, this note is no longer negotiable

dishonoured note receivable is no longer negotiable. However, the payee still has a claim against the maker of the note for both the principal and any unpaid interest. Therefore, if eventual collection is expected, the Notes Receivable account balance and related interest are transferred to an account receivable by debiting Accounts Receivable for the total of the principal amount of the note and the interest due.As shown below, the journal entry to record this is identical to the one above where the note was honoured, except that the debit is to Accounts Receivable rather than to Cash:
\

Question 17

dishonoured note recievable- if there is still hope of collection

JE

Answer 17

JE:

DR A/r
Cr n/r
Cr I/r

Question 18

dishonoured note recievable- if there is no hope of collection

JE

Answer 18

Dr Credit Losses
Cr N/r
CR Int receivable

Question 19

If a company had a material amount of notes receivable or they were a regular feature of the business, then an allowance would have been established. The write-off entry above would then have debited Allowance for Expected Credit Losses, rather than Credit Losses. Because few companies have large numbers of notes receivable, you can assume in the end-of-chapter material that an allowance was not previously established for any estimated uncollectible notes receivable.

Answer 19

If a company had a material amount of notes receivable or they were a regular feature of the business, then an allowance would have been established. The write-off entry above would then have debited Allowance for Expected Credit Losses, rather than Credit Losses. Because few companies have large numbers of notes receivable, you can assume in the end-of-chapter material that an allowance was not previously established for any estimated uncollectible notes receivable.