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Chapter 4

COMMERCE 1AA3 Chapter 5: Chapter-4


Department
Commerce
Course Code
COMMERCE 1AA3
Professor
Aadil Merali Juma
Chapter
4

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Account for Notes Receivable
- Notes are more formal than accounts receivable
o Due within one year or less are current assets
o Beyond one year are long-term receivables and is reported as non-current
o Portion due within one year is a current asset and the remainder is a long-term
asset
- Creditor
o The party to whom money is owed. The creditor is also called the lender. The
debit is a note receivable from the borrower
- Debtor
o The party that borrowed and owes money on the note. The debtor is a note
receivable from the borrower
- Interest
o Interest is the cost of borrowing money. The interest is stated as an annual
percentage rate
- Maturity Date
o The date on which the debtor must pay the note
- Principal
o The amount of money borrowed by the debtor
- Term
o The length of time the debtor has to repay the note
Promissory Note
- Principal amount is $1000.00
- Six Month Note runs from July 1st to December 31st
- Interest is revenue to the creditor and an expense to the debtor

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Example: Assume Canadian Western Bank has an October 31 year-end. The bank earn interest
revenue during July, August, September, and October. At October 31, 2017, the bank accrues
interest revenue for four months as follows
- The bank assets increases and the revenue increases
Example: The bank collects the note on December 31st, 2017
- Formula for Interest Rate
o Principal * Interest Rate * Time (In Fraction) = Amount of Interest
- Some companies sell goods and services on notes receivable (versus selling on accounts
receivable)
Example: For example, assume that on February 1, 2017, Power Ltd. Purchased $5000 of
building supplies from Piercy’s Building Supplies with 60-day credit terms. Piercy’s records the
sale as follows:
If on April 1, 2017 Power Ltd agrees to sign 30-day note receivable to replace the account
receivable due on that date, then Piercy’s would record the following journal entry
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