Notes Receivable

State whether each transaction creates
Accounts Receivable | Notes Receivable

Customer signs a 90-day promissory note.
➛ Notes Receivable

Customer promises verbally to pay later.
➛ Accounts Receivable

Credit sale with a written interest agreement.
➛ Notes Receivable

Sale invoiced without a formal note.
➛ Accounts Receivable

A business accepts a 6-month note for 12,000 at 10% interest.

Tasks
1. Calculate interest earned.
2. Determine total amount due at maturity.


Given
Principal = 12,000
Rate = 10% per annum
Time = 6 months = 6/12 = 0.5 year

Interest earned
Interest = P × R × T
= 12,000 × 10% × 0.5
= 600

Total amount due at maturity
12,000 + 600 = 12,600

Prepare journal entries for

➧ Accepted a 5,000 note from a customer to settle an account receivable.


➧ Accrued interest of 250 at year-end.


➧ Collected the note plus interest at maturity.

A furniture company converts a customer’s overdue balance into a 3-month note of 20,000 at 12% interest.

Questions

Why might the business prefer a note receivable?
➛ It is a formal legal document
➛ It earns interest
➛ It reduces credit risk

Calculate the interest for the note.
➛ Interest = 20,000 × 12% × 0.25
➛ = 600

What is the total amount to be received at maturity?
➛ 20,000 + 600 = 20,600

Identify the journal entries required.

At conversion of receivable to note


At maturity

What is a notes receivable?
➛ Written promises to receive money in the future.

Who is the maker of a note?
➛ The person who promises to pay.

Give one difference between accounts receivable and notes receivable.
➛ Notes receivable are formal and usually interest-bearing; accounts receivable are informal.

Write the interest formula.
➛ Interest = Principal × Rate × Time

Notes receivable are always interest-free.
➛ False

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Allowance for Doubtful Accounts ➧ Here