Page 389 - Accounting Principles (A Business Perspective)

9. Receivables and payables

the payee writes off the account with a debit to Uncollectible Accounts Expense (or to an account with a title such as
Loss on Dishonored Notes) and a credit to Accounts Receivable. The debit should be to the Allowance for
Uncollectible Accounts if the payee made an annual provision for uncollectible notes receivable.

Assume that Price Company pays the interest at the maturity date and issues a new 15 per cent, 90-day note for
USD 18,000. The entries on both sets of books would be:
Cooper Company, Payee Price Company, Maker
Cash (+A) 675 Interest Expense (-SE) 675
Interest Revenue 675 Cash (-A) 675
(+SE) To record the
To record the payment of interest on
receipt of interest note to Cooper
on Price Company Company.
note.
(Optional entry) 18,000 (Optional entry) 18,000
Notes Receivable (+A) 18,000 Notes Payable (-L) 18,000
Notes Receivable (-A) Notes Payable (+L)
To replace old 15%, To replace old 15%,
90-day note from 90-day note to Cooper
Price Company with Company with new
new 15%, 90-day 15%, 90-day note.
note.
Although the second entry on each set of books has no effect on the existing account balances, it indicates that
the old note was renewed (or replaced). Both parties substitute the new note, or a copy, for the old note in a file of
notes.
Now assume that Price Company does not pay the interest at the maturity date but instead includes the interest

in the face value of the new note. The entries on both sets of books would be:
Cooper Company, Payee Price Company, Maker
Notes Receivable (+A) 18,675 Interest Expense (-SE) 675
Interest Revenue (+SE) 675 Notes Payable (-L) 18,000
Notes Receivable (-A) 18,000 Notes Payable (+L) 18,675
To record the To record the
replacement of the replacement of the
old Price Company old $18,000, 15%,
$18,000, 15%, 90- 90-day note to
day note with a Cooper Company with
new $18,675, 15%, a new $18,675, 15%,
90-day note. 90-day note.
On an interest-bearing note, even though interest accrues, or accumulates, on a day-to-day basis, usually both
parties record it only at the note's maturity date. If the note is outstanding at the end of an accounting period,
however, the time period of the interest overlaps the end of the accounting period and requires an adjusting entry at
the end of the accounting period. Both the payee and maker of the note must make an adjusting entry to record the
accrued interest and report the proper assets and revenues for the payee and the proper liabilities and expenses for
the maker. Failure to record accrued interest understates the payee's assets and revenues by the amount of the
interest earned but not collected and understates the maker's expenses and liabilities by the interest expense
incurred but not yet paid.
Payee's books To illustrate how to record accrued interest on the payee's books, assume that the payee, Cooper

Company, has a fiscal year ending on October 31 instead of December 31. On October 31, Cooper would make the
following adjusting entry relating to the Price Company note:
3
Oct. 1 Interest Receivable (+A) 450
Interest Revenue ($18,000 X 0.15 X 60/360) 450
(+SE)
To record interest earned on Price Company

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