Page 388 - Accounting Principles (A Business Perspective)

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Cooper Company, Payee
Accounts Receivable—Price Company (+A)
Aug. 1 18,000
Sales (+SE) 18,000
To record sale of merchandise on account.
Sept. 1 Notes Receivable (+A) 18,000
Accounts Receivable—Price Company (-A) 18,000
To record exchange of a note from Price
Company for open account.
Nov. 30 Cash (+A) 18,675
Notes Receivable (-A) 18,000
Interest Revenue ($18,000 X 0.15 X / ). (+SE) 675
90
360
To record receipt of Price Company note principal
and interest.
Price Company, Maker
Purchase (+A)
Aug. 1 18,000
Accounts Payable—Cooper Company (+L) 18,000
To record purchase of merchandise on account.
Sept. 1 Accounts Payable—Cooper Company (-L) 18,000
Notes Payable (+L) 18,000
To record exchange of a note to Cooper Company
for open account.
Nov. 30 Notes Payable (-L) 18,000
90
Interest Expense ($18,000 X 0.15 X /360). (-SE) 675
Cash (-A) 18,675
To record payment of note principal and interest.
The USD 18,675 paid by Price to Cooper is called the maturity value of the note. Maturity value is the amount
that the maker must pay on a note on its maturity date; typically, it includes principal and accrued interest, if any.
Sometimes the maker of a note does not pay the note when it becomes due. The next section describes how to
record a note not paid at maturity.
A dishonored note is a note that the maker failed to pay at maturity. Since the note has matured, the holder or
payee removes the note from Notes Receivable and records the amount due in Accounts Receivable (or Dishonored
Notes Receivable).

At the maturity date of a note, the maker should pay the principal plus interest. If the interest has not been
accrued in the accounting records, the maker of a dishonored note should record interest expense for the life of the
note by debiting Interest Expense and crediting Interest Payable. The payee should record the interest earned and
remove the note from its Notes Receivable account. Thus, the payee of the note should debit Accounts Receivable
for the maturity value of the note and credit Notes Receivable for the note's face value and Interest Revenue for the
interest. After these entries have been posted, the full liability on the note—principal plus interest—is included in
the records of both parties. Interest continues to accrue on the note until it is paid, replaced by a new note, or

written off as uncollectible. To illustrate, assume that Price did not pay the note at maturity. The entries on each
party's books are:
Cooper Company, Payee
Nov. 30 Accounts Receivable—Price Company (+A) 18,675
Notes Receivable (-A) 18,000
Interest Revenue (+SE) 675
To record dishonor of Price Company note.
Price Company, Maker
Nov. 30 Interest Expense (-SE) 675
Interest Payable (+L) 675
To record interest on note payable.
When unable to pay a note at maturity, sometimes the maker pays the interest on the original note or includes
the interest in the face value of a new note that replaces the old note. Both parties account for the new note in the

same manner as the old note. However, if it later becomes clear that the maker of a dishonored note will never pay,

Accounting Principles: A Business Perspective 389 A Global Text