Unit 2: accounting for receivables introduction

2.4.1 Honor of Notes Receivable
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A note is honored when it is paid in full at its maturity date.

For each interest-bearing note, the amount due at maturity is the face value of the note plus interest for the length of time specified on the note.
To illustrate, assume that ABC Company accepted a Br.10, 000 90 – day, 12% note dated October 18 from XYZ Company on settlement of open account. Record the entry (assuming the cash is collected in the maturity date)

Oct.18 Notes Receivable 10, 000

Account Receivable 10,000
(To record acceptance of xyz co note)

If ABC Company prepares financial statements as of December 31, it would be necessary to accrue interest (from Oct.18 up to Dec.31). In this case, the adjusting entry would be:

Interest accrued = 10,000x 12% x 74/360 = 246.67

Dec.31 Interest Receivable 246.67

Interest Revenue 246.67
(To accrue interest)
The entry to record the honoring of xyz co. note Maturity is:

Jan. 16 Cash 10,300 .00

Notes Receivable 10,000.00
Interest Receivable 246.67
Interest Revenue 53.33
(To record collection of note at maturity)

Total interest earned on this note is Br. 300. This entry’s credit to interest receivable records collection of the interest accrued in the Dec. 31 adjusting entry. The interest earned is Br. 53.33 and reflects the ABC’s revenue from holding the note from January 1 to January 16 of the current period.

2.4.2 Dishonor of Notes Receivable


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A dishonored note is a note that is not paid in full at maturity.

A dishonored note receivable is no longer negotiable. However, the payee still has a claim against the maker of the note. Therefore the Notes Receivable account is usually transferred to an Account Receivable. To illustrate, assume ABC Company a Br. 60,000, 60 days, 12% note dated July 1 on settlement of A/R had been dishonored at maturity. To record the entry would be:

July 1 Notes Receivable – 60,000

Accounts Receivable – 60,000
(To record acceptance of note)
August 30 Accounts Receivable - - 61,200
Notes Receivable - - - - - - 60,000
Interest Revenue - - - - - - 1,200
(To record the dishonor of the note)