8/12/2019 Accounting Ch 26
1/34
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
2/34
Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Businesses issue two types of notes:
interest-bearing notes and non-interest-bearing notes. Businessesrecord the receipt of a note receivableas well as the payment of the note.
Glencoe Accounting Copyright by The McGraw-Hill Companies, Inc. All rights reserved.
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
3/34
Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Explain how businesses use promissory notes.
Calculate and record notes payable and notes receivable.
Explain the difference between interest-bearing and non-interest-bearing notes.
Journalize transactions involving notes payable.
Journalize transactions involving notes receivable.
Glencoe Accounting Copyright by The McGraw-Hill Companies, Inc. All rights reserved.
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
4/34
Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Key Terms
promissory note
note payable
note receivable
principal
face value
term
issue date
Promissory NotesSection 26.1
payee
interest rate
maturity date
maker
interest
maturity value
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
5/34
Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
A Promise to Pay
Promissory NotesSection 26.1
HowPromissoryNotes Are
Used
Paying for Products
Paying for Services
Lending
Borrowing
promissory noteA written promise to pay a certain amount of money
at a specific time.Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
6/34
Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
A Promise to Pay
Promissory NotesSection 26.1
Two Types of
Promissory Notes
Note Payable
Note Receivable
note payableA promissory note issued to a creditor.
note receivableA promissory note that a business accepts
from a customer.Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
7/34Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
A Promise to Pay
Promissory NotesSection 26.1
See page 755Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
8/34Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
A Promise to Pay
Promissory NotesSection 26.1
Calculating a maturity date using a time calendar
Locate the issue datein the Day of month
column. Move acrossto the issue month to
find the day of the year
(September 14 is 257).
Add the number ofdays in the term to the
day of the year(90+257=347).
Find this number inthe month columns(347 corresponds to
December 13).
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
9/34
8/12/2019 Accounting Ch 26
10/34Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Calculation ofInterest on a Note
Promissory NotesSection 26.1
Interest on a Promissory Note IsBased on Three Factors
Principal
Interest Rate
Term of the Note
interest
The fee charged forthe use of money
stated as apercentage of the
principal.
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
11/34Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Calculation ofInterest on a Note
Promissory NotesSection 26.1
Interest = Principal x Interest Rate x Time
Calculating Interest Using a Formula
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
12/34Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Calculation ofInterest on a Note
Promissory NotesSection 26.1
Calculating Interest Using an Interest Table
Find the term of the note in the Day column.
Follow the row until you reach the column for the interest rate.Where they intersect is the factor (per $100 of principal).
Divide the principal of the note by 100.
Multiply the result by the factor to find the amount of interest.
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
13/34Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Calculation ofInterest on a Note
Promissory NotesSection 26.1
Calculating Interest Using an Interest Table
See page 758Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
14/34Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Key Terms
long-term liabilities
interest-bearing note payable
non-interest-bearing note payable
bank discount
proceeds
other expense
Notes PayableSection 26.2
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
15/34Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Interest-BearingNotes Payable
Notes PayableSection 26.2
What Are
Long-Term Liabilities?
long-term liabilitiesDebts that are not required to be paid within the
next accounting period.
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
16/34
8/12/2019 Accounting Ch 26
17/34Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Interest-BearingNotes Payable
Notes PayableSection 26.2
Business Transaction
On April 3 TheStarting Line
borrowed $7,000from State StreetBank and issueda 90-day, 12%note payable to thebank, Note 6.
See pages 760761
Recording the Issuance of anInterest-Bearing Note Payable
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
18/34Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Interest-BearingNotes Payable
Notes PayableSection 26.2
Business Transaction
On July 2 The Starting Line issued Check 3892 for $7,207.12 payable toState Street Bank in payment of the note payable issued April 3.
See page 761
Recording the Payment of anInterest-Bearing Note Payable
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
19/34Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Non-Interest-BearingNotes Payable
Notes PayableSection 26.2
What Is a
Bank Discount?
bank discountThe interest charge deducted in advance on a
non-interest-bearing note payable.
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
20/34Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Non-Interest-BearingNotes Payable
Notes PayableSection 26.2
What Are
Proceeds?
proceedsThe cash actually received by the borrower on a
non-interest-bearing note payable.
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
21/34
8/12/2019 Accounting Ch 26
22/34Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Non-Interest-BearingNotes Payable
Notes PayableSection 26.2
Calculating Non-Interest-Bearing Notes Payable
Face Value x Discount Rate x Time = Bank Discount
$1,500 x 0.12 x 90/365 = $ 44.38
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
23/34Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Non-Interest-BearingNotes Payable
Notes PayableSection 26.2
Business Transaction
On June 12 The Starting Line signed a $1,500, 90-day non-interest-bearingnote payable that First Federal Bank discounted at a rate of 12%, Note 13.
See page 763764
Recording the Issuance of aNon-Interest-Bearing Note Payable
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
24/34Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Non-Interest-BearingNotes Payable
Notes PayableSection 26.2
Business Transaction
On June 12 The Starting Line signed a $1,500, 90-day non-interest-bearingnote payable that First Federal Bank discounted at a rate of 12%, Note 13.
Recording the Issuance of aNon-Interest-Bearing Note Payable
See page 763764
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
25/34Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Non-Interest-BearingNotes Payable
Notes PayableSection 26.2
The Interest Expense
account is classified as an
other expense.
other expenseA nonoperating expense; an expense that does not
result from the normal operations of the business.
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
26/34
Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Non-Interest-BearingNotes Payable
Notes PayableSection 26.2
See page 766
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
27/34
Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Key Term
other revenue
Notes ReceivableSection 26.3
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
28/34
Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Recording the Receiptof a Note Receivable
Notes ReceivableSection 26.3
NotesReceivable
InterestIncome
An asset account, and its normalbalance is a debit.
An other revenue account
other revenueNonoperating revenue that a business receivesfrom activities other than its normal operation.
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
29/34
Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Recording the Receiptof a Note Receivable
Notes ReceivableSection 26.3
Business Transaction
On March 1 The Starting Line sold $1,750 of merchandise on account to Joe Dimaio.That transaction was recorded in The Starting Lines sales journal. Joe cannot pay his
account by the due date. On April 8 The Starting Line received a 60-day, 12.5% note
dated April 6 for $1,750 from Joe Dimaio to settle the account receivable, Note 4.
See page 768769
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
30/34
Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Recording the Receiptof a Note Receivable
Notes ReceivableSection 26.3
Business Transaction
On March 1 The Starting Line sold $1,750 of merchandise on account to Joe Dimaio.That transaction was recorded in The Starting Lines sales journal. Joe cannot pay his
account by the due date. On April 8 The Starting Line received a 60-day, 12.5% note
dated April 6 for $1,750 from Joe Dimaio to settle the account receivable, Note 4.
See page 768769
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
31/34
Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Recording the Paymentof a Note Receivable
Notes ReceivableSection 26.3
Business Transaction
On June 7 The Starting Line received a check dated June 5 for $1,785.96from Joe Dimaio in payment of the $1,750 note of April 6 plus interest of
$35.96, Receipt 996.
See page 769
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
32/34
Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Question 1
Calculate the interest for the following:
Use the formula: Principal X Interest Rate = Time
* $2,500.00 X .12 X 3/12
$ 75.00
163.56
2,310.00
49.73
*
**94.50
** Annual Interest = $31.50 X 3 years
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
33/34
Copyright by The McGraw-Hill Companies, Inc. All rights reserved.Glencoe Accounting
Question 2
Why is interest received from customers considered other revenue?
This is revenue from activities other than the normal operationsof the business. If a company is not in the business of lendingmoney, the revenue from this transaction is considerednonoperating revenue.
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.pps8/12/2019 Accounting Ch 26
34/34
End of
Home
http://localhost/var/www/apps/conversion/tmp/Start_Here.ppshttp://localhost/var/www/apps/conversion/tmp/Start_Here.ppsTop Related