Page 387 - Accounting Principles (A Business Perspective)

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Note that in this calculation we expressed the time period as a fraction of a 360-day year because the interest
rate is an annual rate.
The maturity date is the date on which a note becomes due and must be paid. Sometimes notes require

monthly installments (or payments) but usually all of the principal and interest must be paid at the same time as in
Exhibit 78. The wording in the note expresses the maturity date and determines when the note is to be paid. A note
falling due on a Sunday or a holiday is due on the next business day. Examples of the maturity date wording are:
• On demand. "On demand, I promise to pay..." When the maturity date is on demand, it is at the option of
the holder and cannot be computed. The holder is the payee, or another person who legally acquired the note
from the payee.
• On a stated date. "On 2010 July 18, I promise to pay..." When the maturity date is designated, computing

the maturity date is not necessary.
• At the end of a stated period.
(a) "One year after date, I promise to pay..." When the maturity is expressed in years, the note matures
on the same day of the same month as the date of the note in the year of maturity.
(b)"Four months after date, I promise to pay..." When the maturity is expressed in months, the note
matures on the same date in the month of maturity. For example, one month from 2010 July 18, is 2010
August 18, and two months from 2010 July 18, is 2010 September 18. If a note is issued on the last day
of a month and the month of maturity has fewer days than the month of issuance, the note matures on

the last day of the month of maturity. A one-month note dated 2010 January 31, matures on 2010
February 28.
(c) “Ninety days after date, I promise to pay..." When the maturity is expressed in days, the exact
number of days must be counted. The first day (date of origin) is omitted, and the last day (maturity
date) is included in the count. For example, a 90-day note dated 2010 October 19, matures on 2008
January 17, as shown here:
Life of note (days) 90 days
Days remaining in October not counting date of origin of note:
Days to count in October (31 - 19) 12
Total days in November 30
Total Days in December 31 73
Maturity date in January 17 days
Sometimes a company receives a note when it sells high-priced merchandise; more often, a note results from the
conversion of an overdue account receivable. When a customer does not pay an account receivable that is due, the

company (creditor) may insist that the customer (debtor) gives a note in place of the account receivable. This action
allows the customer more time to pay the balance due, and the company earns interest on the balance until paid.
Also, the company may be able to sell the note to a bank or other financial institution.
To illustrate the conversion of an account receivable to a note, assume that Price Company (maker) had
purchased USD 18,000 of merchandise on August 1 from Cooper Company (payee) on account. The normal credit
period has elapsed, and Price cannot pay the invoice. Cooper agrees to accept Price's USD 18,000, 15 per cent, 90-
day note dated September 1 to settle Price's open account. Assuming Price paid the note at maturity and both
Cooper and Price have a December 31 year-end, the entries on the books of the payee and the maker are:

Accounting Principles: A Business Perspective 388 A Global Text