Bookkeeping

Note Receivable: Definition, Explanation, Journal Entry and Example

2021年04月20日

Possibility 2 – The company realizes the customer will NEVER be able to pay and writes him off. Situation 3 – The customer dishonors the note and does not pay on the due date. Assume if RSP was unable to pay the final installment of USD20,000 and the related interest of USD165 and MPC has been accruing this interest income. MPC has to write off the remaining balance of the note with interest due. Now the note has been completely discharged, MPC has recorded an interest income of USD987.

Short-Term Notes Receivable

From the perspective of the note issuer, the document is referred to as notes payable, indicating the obligation to repay a designated amount on a predetermined future date to the holder of the notes receivable. Notes receivables constitute a written agreement where a borrower commits to repay a specific amount of money, including interest, to the lender on a set date in the future. Therefore, notes are considered negotiable instruments, like cheques and bank drafts. If a note receivable is expected to be collected within one year, it is classified as a current asset on the balance sheet.

How do I record a note receivable in my accounting records?

For example, one month from July 18 is August 18, and two months from July 18 is September 18. To show the initial recording of notes receivable, assume that on 1 July, the Fenton Company accepts a $2,000, 12%, 4-month note receivable from the Zoe Company in settlement of an open account receivable. To log a note receivable, simply debit the notes receivable account and credit the cash account. Often, a business will allow customers to convert their overdue accounts (the business’ accounts receivable) into notes receivable. These loans are typically short term, due to be repaid to the business within one year.

Defaulted Notes Receivable

Thus, a company may have notes receivable or notes payable arising from transactions with customers, suppliers, banks, or individuals. Remember from earlier in the chapter, a note (also called a promissory note) is an unconditional written promise by a borrower to pay a definite sum of money to the lender (payee) on demand or on a specific date. Notes receivables are written promissory notes which give the holder or bearer the right to receive the amount mentioned in the agreement. Sometimes accounts receivables are converted into notes receivables to allow the debtors to pay the balance. However, for any receivables due in less than one year, this interest income component is usually insignificant.

3.2 Maturity (Due) Date

As a result, the carrying amount at the end of each period is always equal to the present value of the note’s remaining cash flows discounted at the 12% market rate. This is consistent with the accounting standards for the subsequent measurement of long-term notes receivable at amortized cost. Notes receivable can arise due to loans, advances to employees, or from higher-risk customers who need to extend the payment period of an outstanding account receivable. Notes can also be used for sales of property, plant, and equipment or for exchanges of long-term assets. Notes arising from loans usually identify collateral security in the form of assets of the borrower that the lender can seize if the note is not paid at the maturity date. A written promise from a client or customer to pay a definite amount of money on a specific future date is called a note receivable.

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Additionally, it explicitly specifies both the principal amount, equivalent to the face value of the notes, and the accompanying interest that must be paid. Notes receivable are written commitments without conditions in which an individual or business pledges to pay a specified amount at a predetermined date or upon request. Disclosure of receivables, including footnote details (related-party receivables), are shown for Scott’s Liquid Gold Inc. below. To provide additional information, the debit could be recorded to an account entitled “Notes Receivable—Dishonored.” Suppose that the same note in Example 1 is discounted on 1 April 2022 instead of 15 May. To simplify the math, we will assume every month has 30 days and each year has 360 days.

• The $18,675 paid by Price to Cooper is called the maturity value of the note.
• All financial assets are to be measured initially at their fair value which is calculated as the present value amount of future cash receipts.
• The amortized discount is added to the note’s carrying value each year, thereby increasing its carrying amount until it reaches its maturity value of $10,000.
• On July 2, BWW determined that Sea Ferries dishonored its note and recorded the following entry to convert this debt into accounts receivable.
• It can be involved in various transactions, including loans, real estate transactions, large credit purchases, and other situations where a formal written agreement is needed.

Format of Notes Receivable

• This will be illustrated when non-interest-bearing long-term notes receivable are discussed later in this chapter.
• For notes discounted with recourse, the original holder is contingently liable for paying the note.
• Notice that the sign for the $7,835 PV is preceded by the +/- symbol, meaning that the PV amount is to have the opposite symbol to the $10,000 FV amount, shown as a positive value.
• Notes receivable have several defining characteristics that include principal, length of contract terms, and interest.
• In contrast, notes receivable (an asset) is a more formal legal contract between the buyer and the company, which requires a specific payment amount at a predetermined future date.
• In this case, the company could extend the payment period and require interest.
• Remember from earlier in the chapter, a note (also called a promissory note) is an unconditional written promise by a borrower to pay a definite sum of money to the lender (payee) on demand or on a specific date.