What is Notes Receivable?
The notes receivable is a return promise by the buyer to repay a certain due amount to the seller within a certain time period. A note receivable is a written agreement between the maker and payee. It is also used to finance short-term funds to clients or customers. The notes receivable are of two types:
- Interest-bearing notes
- Non-interest bearing notes
Interest-Bearing Notes Receivable Definition
The interest-bearing note receivable is a note on which interest rate is quoted and interest is paid on the due date along with the principal amount. These notes receivable are also called non-discounted notes receivable.
Non-interest Bearing Notes
A note receivable on which interest rate is not specified but the total interest amount is deducted on advance is called non-interest bearing notes receivable. Non-interest-bearing notes are also called discounted note receivables because the payment is made to the client by discounting or deducting the interest amount from the agreed principal amount. And on the due date, the client should pay the agreed principal amount.
Example of notes receivable
Interest-bearing notes receivable
When the due date finished before the closing date
Example 1:
A Company lent Rs. 1,50,000 to B Company in exchange of 3 months notes receivable at 12% interest rate per annum on October 1, 2017. The accounting year closing date of A Company on December 31.
Required: Prepare necessary journal entries.
Solution:
Journal entries
In the books of A Company
October 1, 2017
Notes receivable a/c Dr. Rs. 1,50,000
Cash a/c Rs. 1,50,000
(To record the amount lent to B company in exchange of 3 months notes receivable)
December 31, 2017
Cash a/c Dr. Rs. 1,54,500
Note receivable a/c Rs. 1,50,000
Interest revenue a/c Rs. 4,500
(To record the cash received in exchange of notes with interest)
Where,
Annual interest expense = 12% of Rs. 1,50,000 = Rs. 18,000
3 months interest expense = 18,000 × 3 / 12 = Rs. 4,500
When the due date finished after the closing date
Example 2:
A Company lent Rs. 1,50,000 to B Company in exchange of 3 months notes receivable at 12% interest rate per annum on November 1, 2017. The accounting year closing date of A Company on December 31.
Required: Prepare necessary journal entries.
Solution:
Journal entries
In the books of A Company
November 1, 2017
Note receivable a/c Dr. Rs. 1,50,000
Cash a/c Rs. 1,50,000
(To record the amount lent to B company in exchange of 3 months notes receivable)
December 31, 2017
Interest receivable a/c Dr. Rs. 3,000
Interest revenue a/c Rs. 3,000
(Ti record the interest receivable on notes of 2 months)
January 31, 2018
Cash a/c Dr. Rs. 1,54,500
Note receivable a/c Rs. 1,50,000
Interest receivable a/c Rs. 3,000
Interest revenue a/c Rs. 1,500
(To record the cash received in exchange of note with interest)
Non-interest bearing notes receivable
When the due date finished before the closing date
Example 3:
A Company lent Rs. 1,50,000 to B Company LTD. discounting at 12% interest rate per annum by receiving notes from B Company on October 1, 2017. The closing accounting year date of A company on December 31.
Required: Prepare necessary journal entries.
Solution:
| A total amount of note Discounted amount | 1,50,000 4,500 |
| 1,45,500 |
Journal entries
In the books of A Company
October 1, 2017
Note receivable a/c Dr. Rs. 1,50,000
Cash a/c Rs. 1,45,500
Discount on note receivable a/c Rs. 4,500
(To record the cash paid to B Company at 12% discount in exchange of three months loan)
December 31, 2017
Cash a/c Dr. Rs. 1,50,000
Discount on note receivable a/c Rs. 4,500
Notes receivable a/c Rs. 1,50,000
Interest revenue a/c Rs. 4,500
(To record the cash received in exchange of note)
When due date finished after the closing date
A Company lent Rs. 1,50,000 to B Company LTD. discounting at 12% interest rate per annum by receiving notes from B Company on November 1, 2017. The closing accounting year date of A company on December 31.
Required: Prepare necessary journal entries.
Solution:
Journal entries
In the books of A Company
November 1, 2017
Notes receivables a/c Dr. Rs. 1,50,000
Cash a/c Rs. 1,45,500
Discount on note receivable a/c Rs. 4,500
(To record the cash paid to B Company at 12% discount in exchange of 3 months loan)
December 31, 2017
Discount on note receivables a/c Dr. Rs. 3,000
Interest revenue a/c Rs. 3,000
(To record the interest receivable occurred of two months on loan)
January 31, 2018
Cash a/c Dr. Rs. 1,50,000
Discount on note receivable a/c Rs. 1,500
Interest revenue a/c Rs. 1,500
Note receivables a/c Rs. 1,50,000
(TO record the cash received in exchange of note)
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