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3 2 8 Chapter 8 • Receivables
Interest
A note normally specifies that interest be paid for the period between the issuance
date and the due date. 5 Notes covering a period of time longer than one year nor-
mally provide that the interest be paid semiannually, quarterly, or at some other
Your credit card balances that are
not paid at the end of the month stated interval. When the term of the note is less than one year, the interest is usu-
incur an interest charge expressed ally payable on the due date of the note.
as a percent per month. Interest The interest rate on notes is normally stated in terms of a year, regardless of the
charges of 1V2% per month are actual period of time involved. Thus, the interest on $2,000 for one year at 12% is
common. Such charges approxi- $240 (12% of $2,000). The interest on $2,000 for one-fourth of one year at 12% is
mate an annual interest rate of
18% per year (1V2% X 12). Thus, $60 (1/4 of $240).
if you can borrow money at less The basic formula for computing interest is as follows:
than 1 8 % , you are better off
borrowing the money to pay off
the credit card balance. Face Amount (or Principal) X Rate X Time = Interest
To illustrate the formula, the interest on the note in Exhibit 4 is computed as
follows:
$2,500 X 0.10 90 $62.50 interest
360
In computing interest for a period of less than one year, agencies of the federal
government and many financial institutions use the actual number of days in the year,
365. In the preceding computation, for example, the time would have been stated
as 90/365 of one year. To simplify computations, however, w e will use 360 days.
Maturity Value
W h a t is the maturity value of a The amount that is due at the maturity or due date is called the maturity value.
$15,000, 90-day, 12% note? The maturity value of a note is the sum of the face amount and the interest. In the
$15,450 [$15,000 + ($15,000 X note in Exhibit 4, the maturity value is $2,562.50 ($2,500 face amount plus $62.50
0.12 X 90/360)] interest).
Accounting for Notes Receivable
As w e mentioned earlier, a note may be received from a customer to replace an
objective 7 account receivable. To illustrate, assume that a 30-day, 12% note dated November
Journalize t h e entries for 21, 2006, is accepted in settlement of the account of W. A. Bunn Co., which is
notes receivable transactions. past due and has a balance of $6,000. The entry to record the transaction is as
follows:
Nov. 21 Notes Receivable 6 0 0 0 00
Accounts Receivable—W. A. Bunn Co. 6 0 0 0 00
Received 30-day, 12% n o t e d a t e d
N o v e m b e r 21, 2006.
When the note matures, the entry to record the receipt of $6,060 ($6,000 princi-
pal plus $60 interest) is as follows:
5 Youmay occasionally see references to non-interest-bearing notes receivable. Such notes, which are not widely used,
normally include an implicit interest rate.
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Chapter 8 • Receivables 3 2 9
Dec. 21 Cash 6 0 6 0 00
Notes Receivable 6 0 0 0 00
Interest Revenue 6 0 00
Received principal and interest o n
m a t u r e d note.
If the maker of a note fails to pay the debt on the due date, the note is a dis-
honored note receivable. When a note is dishonored, the face value of the note
plus any interest due is transferred to the accounts receivable account. For exam-
ple, assume that the $6,000, 30-day, 12% note received from W. A. Bunn Co. and
recorded on November 21 is dishonored at maturity. The entry to transfer the note
and the interest back to the customer's account is as follows:
Dec. 21 Accounts Receivable—W. A. Bunn Co. 6 0 6 0 00
Notes Receivable 6 0 0 0 00
Interest Revenue 6 0 00
To record dishonored note and
interest.
The interest of $60 has been earned, even though the note has been dishonored.
If the account receivable is uncollectible, the amount of $6,060 will be written off
against the Allowance for Doubtful Accounts.
If a note matures in a later fiscal period, the interest accrued in the period in
which the note is received must be recorded by an adjusting entry. For example,
assume that a 90-day, 12% note dated December 1, 2006, is received from Crawford
Company to settle its account, which has a balance of $4,000. Assuming that the ac-
counting period ends on December 31, the entries to record the receipt of the note,
accrued interest, and payment of the note at maturity are shown below.
2006
Dec. 1 Notes Receivable 4 0 0 0 00
Accounts Receivable—Crawford
Company 4 0 0 0 00
Received note in settlement of
account.
Dec. 31 Interest Receivable 4 0 00
Interest Revenue 4 0 00
Adjusting entry f o r accrued
interest, $4,000 x 0.12 x 30/360.
2007
Mar. 1 Cash 4 1 2 0 00
Notes Receivable 4 0 0 0 00
Interest Receivable 4 0 00
Interest Revenue 8 0 00
Received payment of note and
interest; maturity value, $4,000 +
($4,000 x 0.12 x 90/360).
The interest revenue account is closed at the end of each accounting period. The
amount of interest revenue is normally reported in the Other Income section of the
income statement.
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3 3 0 Chapter 8 • Receivables
Receivables on the Balance Sheet
objective 8 All receivables that are expected to be realized in cash within a year are presented
in the Current Assets section of the balance sheet. It is normal to list the assets in
Prepare t h e C u r r e n t Assets the order of their liquidity. This is the order in which they are expected to be con-
p r e s e n t a t i o n o f receivables o n verted to cash during normal operations. An example of the presentation of receiv-
t h e balance sheet. ables is shown in the partial balance sheet for Crabtree Co. in Exhibit 5.
•Exhibit 5 Receivables on Balance Sheet
Crabtree Co.
Balance Sheet
December 31, 2006
Assets
Current assets:
Cash $119 5 0 0 00
Notes receivable 250 0 0 0 00
Accounts receivable $445 0 0 0 00
Less a l l o w a n c e f o r d o u b t f u l accounts 15 0 0 0 00 430 0 0 0 00
Interest receivable 14 5 0 0 00
The balance of Crabtree's notes receivable, accounts receivable, and
The following credit risk disclosure interest receivable accounts are reported in Exhibit 5. The allowance for
appeared in the financial statements doubtful accounts is subtracted from the accounts receivable. Alterna-
of Deere & C o m p a n y : tively, the accounts receivable may be listed on the balance sheet at its
Credit receivables have signifi- net realizable value of $430,000, with a note showing the amount of the
cant concentrations of credit risk in allowance. If the allowance account includes provisions for doubtful notes
the agricultural, industrial, lawn as well as accounts, it should be deducted from the total of Notes Re-
and grounds care, and recreational
(non-Deere equipment) business sectors. . . . The ceivable and Accounts Receivable.
portion of credit receivables related to the agricul- Other disclosures related to receivables are presented either on the
tural equipment business was 60%; that related face of the financial statements or in the accompanying notes. Such dis-
to the industrial equipment business was 12%; closures include the market (fair) value of the receivables. 6 In addition,
that related to the lawn and grounds care equip-
ment business was 7%; and that related to the if unusual credit risks exist within the receivables, the nature of the risks
recreational equipment business was 21%. On a should be disclosed. For example, if the majority of the receivables are
geographic basis, there is not a disproportionate due from one customer or are due from customers located in one area
concentration of credit risk in any area. . . . of the country or one industry, these facts should be disclosed. 7
Financial Analysis and Interpretation
objective 9 Businesses that grant long credit terms tend to have relatively greater amounts tied
up in accounts receivable than those granting short credit terms. In either case, it is
C o m p u t e a n d interpret t h e
accounts receivable t u r n o v e r
a n d t h e n u m b e r of days' sales Statement of Financial Accounting Standards, No. 107, "Disclosures about Fair Value of Financial Instruments," Finan-
6
in receivables. cial Accounting Standards Board, Norwalk, 1991, pars. 10 and 19.
Statement of Financial Accounting Standards, No. 105, "Disclosure of Information about Financial Instruments with
7
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk," Financial Accounting Standards
Board, Norwalk, 1990, par. 20, and Statement of Financial Accounting Standards, No. 107, op.cit., par. 13.
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