Fall 2020 Chapter 8 11
th
ED
9
LO 3: Explain how companies recognize, value, and dispose of Notes Receivable.
Promissory Note: “written promise to pay a specified amount of money on demand or at a definite
time.”
• Promissory notes may be used when
1. Individuals and companies lend or borrow money.
2. Amount of transaction and credit period exceed normal limits.
3. In settlement of accounts receivable.
• Used for a credit period of more than 60 days. If it is going to be collected WITHIN ONE YEAR, it is
classified as a current asset on the balance sheet. If it is going to be collected AFTER MORE THAN A
YEAR, then it is classified as a noncurrent asset as an investment on the balance sheet.
• Report short-term notes receivable at their cash (net) realizable value.
• Estimation of cash realizable value and recording bad debt expense and related allowance are
similar to accounts receivable.
EXAMPLE used for terms below: A NOTE DATED JUNE 20, 20XX FOR RON TO PAY CAM $1,000 ON
OCTOBER 20, 20XX WITH AN INTEREST RATE OF 10%.
1. Face Value of a Note (Principal): specified amount of money at a definite future date.
(Ex: $1,000)
2. Maker of the Note: the person who signed the note and promised to pay it at maturity. (Ex: RON)
• The maker of the note recognizes a note payable.
3. Payee of the Note: the person to whom the note is payable. (Ex: CAM)
• The payee of the note recognizes a note receivable.
4. Issuance Date: the date the note is issued. (Ex: JUNE 20, 20XX)
5. Maturity date of the Note: the date the note must be repaid. (Ex: OCTOBER 20, 20XX)
• May be stated on demand, on a stated date, or at the end of a stated period of time.
• Note terms are expressed in months and days.
*When months or years are used, the note matures and is payable in the month of its maturity on the
same day of the month as its original date. For example, a 9-month note dated September 28 would be
payable on June 28.
*If days, then have to count days in the month. DON’T INCLUDE DATE OF NOTE AS PART OF NUMBER OF
DAYS. For example, if note issued March 16 the amount of days note is outstanding in
March is 31 days – 16 = 15 days.