Page 390 - Accounting Principles (A Business Perspective)

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note
for the period September 1 through October
31.
The Interest Receivable account shows the interest earned but not yet collected. Interest receivable is a
current asset in the balance sheet because the interest will be collected in 30 days. The interest revenue appears in
the income statement. When Price pays the note on November 30, Cooper makes the following entry to record the
collection of the note's principal and interest:
Nov. 3 Cash (+A) 18,675
0
Notes Receivable (-A) 18,000
Interest Receivable (-A) 450
Interest Revenue (+SE) 225
To record collection of Price Company note
and
interest.
Note that the entry credits the Interest Receivable account for the USD 450 interest accrued from September 1
through October 31, which was debited to the account in the previous entry, and credits Interest Revenue for the
USD 225 interest earned in November.
Maker's books Assume Price Company's accounting year also ends on October 31 instead of December 31.
Price's accounting records would be incomplete unless the company makes an adjusting entry to record the liability
owed for the accrued interest on the note it gave to Cooper Company. The required entry is:
Oct. 3 Interest Expense ($18,000 X 0.15 X /360) (- 450
60
1 SE)
Interest Payable (+L) 450
To record accrued interest on note to Cooper
Company for the period September 1 through
October 31.
The Interest Payable account, which shows the interest expense incurred but not yet paid, is a current
liability in the balance sheet because the interest will be paid in 30 days. Interest expense appears in the income
statement. When the note is paid, Price makes the following entry:

Nov. 3 Notes Payable (-L) 18,000
0
Interest Payable (-L) 450
Interest Expense (-SE) 225
Cash (-A) 18,675
To record payment of principal and interest on
note to Cooper Company.
In this illustration, Cooper's financial position made it possible for the company to carry the Price note to the
maturity date. Alternatively, Cooper could have sold, or discounted, the note to receive the proceeds before the
maturity date. This topic is reserved for a more advanced text.
Short-term financing through notes payable

A company sometimes needs short-term financing. This situation may occur when (1) the company's cash
receipts are delayed because of lenient credit terms granted customers, or (2) the company needs cash to finance
the buildup of seasonal inventories, such as before Christmas. To secure short-term financing, companies issue
interest-bearing or non interest-bearing notes.

Interest-bearing notes To receive short-term financing, a company may issue an interest-bearing note to a
bank. An interest-bearing note specifies the interest rate charged on the principal borrowed. The company receives

Accounting Principles: A Business Perspective 391 A Global Text