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ACCT 200 Lecture Notes - Lecture 22: Accounts Receivable, Promissory Note, Current Asset

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ivorysea-lion839
30 Aug 2018
School
University of Arizona
Department
Accounting
Course
ACCT 200
Professor
All

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Document Summary

Notes more formal document generally used for a longer time (still current asset) Promissory note is a written promise to pay a specified amount of money on demand or at a definite time (includes interest) Promissory notes may be used : 1. when individuals and companies lend or borrow money. 2. when amount of transaction and credit period exceed normal limits, or 3. in settlement of accounts receivable. To the payee, the promissory note is a note receivable. To the maker, the promissory note is a note payable. Maturity date of a promissory note may be stated in one of three ways: 1. on demand 2. on a stated date 3. at the end of a stated period of time. Note terms are expressed in: months and days. Interest is a function of time be careful the counting months. Managing accounts receivable involves five steps: 1. determine to whom to extend credit.

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Related Questions

Shamrock owns a unique little company called “WORMS-R- US” that supplies all the
worms that you see in the bottom of bottles of tequila. Shamrock enters into a contract
with MANUAL MANURE, a Spanish worm grower, to buy 1000 pounds of Grade “A”
worms for $2,000. Shamrock gives Manual a promissory note in the amount of $2,000,
payable to the order of Manual Manure and payable on demand. The note is signed by

Shamrock and the worms are to be delivered to Shamrock within 10 days of the signing
of the promissory note at which time Shamrock will pay the sum of $2,000 plus interest
to Manual. Manual takes the promissory note to his good friend MEYER GOLDBERG,
a Jewish candle maker, and asks Meyer if he would buy the promissory note. Meyer
agrees and gives Manual a check for $2,000 payable to the order of Manual Manure and
Manual endorses the back of the promissory note by qualified endorsement and gives the
note to Meyer. The check is written on the Deposit Bank & Trust Company. Manual
takes this check to the Bank, signs the back of the check with a blank indorsement and he
cashes the check. Manual promptly looses the $2,000 in a game in the basement of
“Our Lady of Loser’s” Catholic Church and Manual delivers no worms to Shamrock.
After ten days Meyer demands payment of the promissory note from Shamrock and
Manual. Using this fact situation please answer the following questions:
A. Who of the above named parties would be best described as:
1. Endorser: 6. Maker:
2. Endorsee: 7. Payee:
3. Bearer: 8. Holder
4. Drawer:
5. Drawee:

B. What are Meyer’s rights to collect the $2,000 on the promissory note from Shamrock
and Manual and under what theory or theories of law can he collect or not collect?

Select the term that best fits each of the following definitions and descriptions.

a.

Notes receivable

b.

Nontrade receivables

c.

Net realizable value

d.

Direct write-off method

e.

Interest-bearing note

f.

Maturity date

g.

Promissory note

h.

Factoring receivables

i.

Trade discount

j.

Present value

k.

Allowance method

l.

Sales discount

m.

Negotiable note

n.

Non-interest-bearing note

o.

Assignment of receivables

p.

Valuation date

____ 21. Receivables that are evidenced by a formal written promise to pay a certain sum of money at a specified date.

____ 22. The date the principal amount of a note is due to be paid.

____ 23. The sum of future receipts or payments discounted to the present date at an appropriate rate of interest.

____ 24. A method of recognizing the estimated losses from uncollectible accounts as expenses during the period in which the sales occur.

____ 25. A note that is legally transferable by endorsement and delivery.

____ 26. Any receivable arising from transactions that are not directly associated with the normal operating activities of a business.

____ 27. A note written in the form where the face amount includes the interest charges.

____ 28. The borrowing of money with receivables pledged as security on the loan.

____ 29. A note written in the form where the maker promises to pay the face amount plus interest at a specified rate.

____ 30. An unconditional written promise to pay a certain sum of money at a specified time.

Blanton Plastics, a household plastic product manufacturer, borrowed $14 million cash on October 1, 2018, to provide working capital for year-end production. Blanton issued a four-month, 12% promissory note to L&T Bank under a prearranged short-term line of credit. Interest on the note was payable at maturity. Each firm’s fiscal period is the calendar year. Required: 1. Prepare the journal entries to record (a) the issuance of the note by Blanton Plastics and (b) L&T Bank’s receivable on October 1, 2018. 2. Prepare the journal entries by both firms to record all subsequent events related to the note through January 31, 2019. 3. Suppose the face amount of the note was adjusted to include interest (a noninterest-bearing note) and 12% is the bank’s stated discount rate. (a) Prepare the journal entries to record the issuance of the noninterest-bearing note by Blanton Plastics on October 1, 2018, the adjusting entry at December 31, and payment of the note at maturity. (b) What would be the effective interest rate?