{"id":142,"date":"2015-03-18T23:53:48","date_gmt":"2015-03-18T23:53:48","guid":{"rendered":"https:\/\/courses.candelalearning.com\/finacct2x10xmaster\/?post_type=chapter&#038;p=142"},"modified":"2017-08-22T16:39:34","modified_gmt":"2017-08-22T16:39:34","slug":"accounting-for-notes-receivable","status":"web-only","type":"chapter","link":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/chapter\/accounting-for-notes-receivable\/","title":{"raw":"Accounting for Notes Receivable","rendered":"Accounting for Notes Receivable"},"content":{"raw":"<strong>\u00a0Notes receivable\u00a0<\/strong>\r\n\r\nhttps:\/\/youtu.be\/DDWmiuUKUFc\r\n<h4><strong>\u00a0<\/strong><\/h4>\r\nRemember from earlier in the chapter, a\u00a0note (also called a <strong>promissory note<\/strong><strong>)<\/strong> is an unconditional written promise by a borrower\u00a0to pay a definite sum of money to the lender <strong>(payee)<\/strong> on demand or on a specific date. On the balance sheet of the lender (payee), a note is a receivable.\u00a0 A customer may give a note to a business for an amount due on an account receivable or for the sale of a large item such as a refrigerator. Also, a business may give a note to a supplier in exchange for merchandise to sell or to a bank or an individual for a loan. Thus, a company may have notes receivable or notes payable arising from transactions with customers, suppliers, banks, or individuals.\r\n\r\nMost promissory notes have an explicit interest charge. <strong>Interest<\/strong> is the fee charged for use of money over a period. To the maker of the note, or borrower, interest is an expense; to the payee of the note, or lender, interest is a revenue. A borrower incurs interest expense; a lender earns interest revenue. For convenience, bankers sometimes calculate interest on a 360-day year; we calculate it on that basis in this text. (Some companies use a 365-day year.)\r\n\r\nThe basic formula for computing interest is:\r\n\r\n<strong>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Principal x Interest Rate x Frequency of a year<\/strong>\r\n\r\n<strong>Principal<\/strong> is the face value of the note. The interest r<strong>ate<\/strong> is the annual stated interest rate on the note. Frequency of a year is the amount of time for the note\u00a0and can be either days or months.\u00a0 We need the frequency of a year because the interest rate is an annual rate and we may not want interest for an entire year but just for the time period of the note.\r\n\r\nTo show how to calculate interest, assume a company borrowed $20,000 from a bank. The note has a principal (face value) of\u00a0 $20,000, an annual interest rate of 10%, and a life of 90 days. The interest calculation is:\r\n\r\n$20,000 principal x 10% interest rate x (90 days \/ 360 days) = $500\r\n\r\n<em>Note that in this calculation we expressed the time period as a fraction of a 360-day year because the interest rate is an annual rate and the note life was days.\u00a0 If the note life was months, we would divide\u00a0by 12 months for a year.<\/em>\r\n\r\nThe <strong>maturity date<\/strong> is the date on which a note becomes due and must be paid. Sometimes notes require monthly installments (or payments) but usually all of the principal and interest must be paid at the same time. The wording in the note expresses the maturity date and determines when the note is to be paid. A note falling due on a Sunday or a holiday is due on the next business day. Examples of the maturity date wording are:\r\n<ul>\r\n \t<li>On demand. \u201cOn demand, I promise to pay\u2026\u201d When the maturity date is on demand, it is at the option of the holder and cannot be computed. The holder is the payee, or another person who legally acquired the note from the payee.<\/li>\r\n \t<li>On a stated date. \u201cOn\u00a0July 18, 2015, I promise to pay\u2026\u201d When the maturity date is designated, computing the maturity date is not necessary.<\/li>\r\n \t<li>At the end of a stated period.<\/li>\r\n<\/ul>\r\n(a<em>)\u201dOne year after date, I promise to pay\u2026\u201d<\/em> When the maturity is expressed in years, the note matures on the same day of the same month as the date of the note in the year of maturity.\r\n\r\n(b<em>)\u201dFour months after date, I promise to pay\u2026\u201d<\/em> When the maturity is expressed in months, the note matures on the same date in the month of maturity. For example, one month from\u00a0July 18 is August 18, and two months from\u00a0 July 18 is\u00a0 September 18. If a note is issued on the last day of a month and the month of maturity has fewer days than the month of issuance, the note matures on the last day of the month of maturity. A one-month note dated\u00a0 January 31, matures on February 28.\r\n\r\n(c)\u00a0 \u201c<em>Ninety days after date, I promise to pay\u2026\u201d<\/em> When the maturity is expressed in days, the exact number of days must be counted. The first day (date of origin) is omitted, and the last day (maturity date) is included in the count. For example, a 90-day note dated\u00a0 October 19 matures on\u00a0 January 17 of the next year, as shown here:\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><strong>Life of note (days)<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>90 days<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Days remaining in October not counting date of origin of note:<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Days to count in October (31 \u2013 19)<\/strong><\/td>\r\n<td><strong>12<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Total days in November<\/strong><\/td>\r\n<td><strong>30<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Total Days in December<\/strong><\/td>\r\n<td><strong>31<\/strong><\/td>\r\n<td><strong>73<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\n\n<strong>Maturity date in January<\/strong>\r\n\r\n(90 total days - 73 days from Oct to Dec)<\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>17 days<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\nSometimes a company receives a note when it sells high-priced merchandise; more often, a note results from the conversion of an overdue account receivable. When a customer does not pay an account receivable that is due, the company may insist that the customer\u00a0 gives a note in place of the account receivable. This action allows the customer more time to pay the balance due, and the company earns interest on the balance until paid. Also, the company may be able to sell the note to a bank or other financial institution.\r\n\r\nTo illustrate the conversion of an account receivable to a note, assume that Price Company\u00a0 had purchased\u00a0$18,000 of merchandise on August 1 from Cooper Company on account. The normal credit period has elapsed, and Price cannot pay the invoice. Cooper agrees to accept Price\u2019s\u00a0$18,000, 15%, 90-day note dated September 1 to settle Price\u2019s open account. Assuming Price paid the note at maturity and both Cooper and Price have a December 31 year-end, the entries on the books of Cooper are:\r\n<div>\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td>\n\n&nbsp;\r\n\r\n<strong>Aug<\/strong><\/td>\r\n<td>\n\n&nbsp;\r\n\r\n<strong>1<\/strong><\/td>\r\n<td>\n\n&nbsp;\r\n\r\n<strong>Accounts Receivable\u2014Price Company\u00a0<\/strong><\/td>\r\n<td style=\"text-align: center\">\n\n<strong>Debit<\/strong>\r\n\r\n<strong>18,000<\/strong><\/td>\r\n<td style=\"text-align: center\">\n\n<strong>\u00a0Credit<\/strong>\r\n\r\n&nbsp;<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>Sales<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>18,000<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>To record sale of merchandise on account.<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Sept.<\/strong><\/td>\r\n<td><strong>1<\/strong><\/td>\r\n<td><strong>Notes Receivable\u00a0<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>18,000<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>Accounts Receivable\u00a0<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>18,000<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>\u00a0To record exchange of a note from Price Company for open account.<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>Nov.<\/strong><\/td>\r\n<td><strong>30<\/strong><\/td>\r\n<td><strong>Cash\u00a0<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>18,675<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>Notes Receivable<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>18,000<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>Interest Revenue [18,000 x 15% x (90\/360)]<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>675<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>\u00a0To record receipt of Price Company note principal and interest.<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\r\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n<em>\u00a0Note:\u00a0 Maturity date calculated as November 30 since it was a 90 day note - 29 days left in September (30 days in Sept - note day Sept 1) - 31 days in October leaves 30 days remaining in November.<\/em>\r\n\r\nThe\u00a0$18,675 paid by Price to Cooper is called the <strong>maturity value<\/strong> of the note. Maturity value is the amount that the\u00a0company (maker)\u00a0must pay on a note on its maturity date; typically, it includes principal and accrued interest, if any.\r\n\r\nSometimes 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.\r\n\r\n<span style=\"color: #ff0000\">\u00a0<\/span>\r\n\r\nA <strong>dishonored note<\/strong> 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.\r\n\r\nAt the maturity date of a note, the maker is responsible for the principal plus interest. 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\u2019s face value and Interest Revenue for the interest.\r\n<table>\r\n<tbody>\r\n<tr>\r\n<td><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td>\n\n&nbsp;\r\n\r\n<strong>Nov.<\/strong><\/td>\r\n<td>\n\n&nbsp;\r\n\r\n<strong>30<\/strong><\/td>\r\n<td>\n\n&nbsp;\r\n\r\n<strong>Accounts Receivable\u2014Price Company <\/strong><\/td>\r\n<td>\n\n<strong>Debit<\/strong>\r\n\r\n<strong>18,675<\/strong><\/td>\r\n<td>\n\n<strong>\u00a0Credit<\/strong>\r\n\r\n&nbsp;<\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>Notes Receivable <\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>18,000<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>Interest Revenue <\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>675<\/strong><\/td>\r\n<\/tr>\r\n<tr>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>To record dishonor of Price Company note.<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<td><strong>\u00a0<\/strong><\/td>\r\n<\/tr>\r\n<\/tbody>\r\n<\/table>\r\n&nbsp;\r\n\r\n&nbsp;\r\n<h1>\u00a0Accounting in the Headlines<\/h1>\r\n<h3 class=\"title\">How does Square account for the amounts it loans to small\u00a0businesses?<\/h3>\r\n<div class=\"entry\">\r\n\r\n<a href=\"https:\/\/wtietz.files.wordpress.com\/2015\/04\/square-reader.jpg\"><img class=\"size-medium wp-image-1358\" src=\"https:\/\/wtietz.files.wordpress.com\/2015\/04\/square-reader.jpg?w=300&amp;h=264\" alt=\"picture of Square reader\" width=\"300\" height=\"264\" \/><\/a>\r\n\r\n<a href=\"https:\/\/squareup.com\/\">Square<\/a>, the mobile payments company, allows small businesses to take credit cards by swiping customer credit cards using a small square device attached to the audio jack found on mobile devices. Since its founding in 2009 and the launch of its first app in 2010, Square has found its way into many small businesses \u2013 and large businesses.\u00a0 Starbucks uses Square to process transactions with credit or debit card customers.\u00a0 In November 2014, Square announced that it would be accepting Apple Pay. Whole Foods uses Square in select locations.\r\n\r\nSquare has recently gotten into lending money to its customers through its <a href=\"https:\/\/squareup.com\/capital?gclid=Cj0KEQjwpM2pBRChsZCzm_CU0t4BEiQAxDVFmlgr93b9rx3j8f1oNzBJ4TYsmKpRMTNs_EsMKMDAr8AaAqoa8P8HAQ&amp;pcrid=40961487337&amp;pdv=c&amp;pkw=square+capital&amp;pmt=e\">Square Capital<\/a> program.\u00a0 According to Business Insider (<a href=\"http:\/\/www.businessinsider.com\/square-capital-loaned-out-100-million-to-small-businesses-2015-4\">April 15, 2015 article<\/a>), Square has paid out over $100 million in small business financing over the past year.\r\n\r\nSee Jack Dorsey, co-founder of Square, explain the small business loan concept in this CNN Money video (2:26 minutes) at <a href=\"http:\/\/money.cnn.com\/video\/technology\/2014\/05\/28\/t-square-capital-dorsey.cnnmoney\/\">http:\/\/money.cnn.com\/video\/technology\/2014\/05\/28\/t-square-capital-dorsey.cnnmoney\/<\/a> \u00a0Essentially, the business owner clicks on a link in the Square Capital app to let Square know that the business would like to borrow a certain amount of money. \u00a0Square Capital calls this step \u201crequesting capital.\u201d The next morning, the funds are deposited in the checking account of that business. \u00a0\u00a0The business pays Square back the funds by having a certain percentage of each day\u2019s receipts deducted for the payback.\r\n\r\nFor example, if a business wants to borrow $7,000, Square might charge a total of $7,910 for the loan.\u00a0 Upon approval, the $7,000 is deposited into the business\u2019s checking account the next day and then Square charges 9% of the business\u2019s credit card sales each day until the $7,910 is fully paid.\u00a0 Square says that the advantage of this percentage-of-sales method is that the business does not have to make large payments when business is slow. The percentage that Square charges stays constant until the loan is paid off fully.\r\n\r\nSquare determines the amount to be charged for the loan and the percentage to be charged each day using data analytics.\u00a0 Each Square account has potentially different terms based on its history and trends.\r\n\r\n<strong>Questions<\/strong>\r\n<ol>\r\n \t<li>Square Capital states that the first step for business owners is to \u201crequest capital.\u201d Are the business owners actually requesting capital?<\/li>\r\n \t<li>In the example given in the blog post, the business borrows $7,000 and pays back $7,910 by paying 9% of its credit card receipts each day until paid in full. Is the 9% the interest rate charged? Why or why not?<\/li>\r\n \t<li>Is the amount of cash deposited by Square Capital in its customers\u2019 (the small businesses requesting funds) checking accounts classified as ACCOUNTS RECEIVABLE or NOTES RECEIVABLE by Square Capital? Explain.<\/li>\r\n \t<li>What is the difference between the amount of funds deposited in the customers\u2019 accounts and the total amount paid back by customers classified as by Square Capital?<\/li>\r\n \t<li>What do you think of this practice by Square Capital?<\/li>\r\n<\/ol>\r\n<\/div>\r\n<\/div>\r\nhttp:\/\/www.openassessments.org\/assessments\/1182","rendered":"<p><strong>\u00a0Notes receivable\u00a0<\/strong><\/p>\n<p><iframe loading=\"lazy\" id=\"oembed-1\" title=\"Interest Bearing Notes Receivable Entries (Intermediate Financial Accounting I #10)\" width=\"500\" height=\"281\" src=\"https:\/\/www.youtube.com\/embed\/DDWmiuUKUFc?feature=oembed&#38;rel=0\" frameborder=\"0\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<h4><strong>\u00a0<\/strong><\/h4>\n<p>Remember from earlier in the chapter, a\u00a0note (also called a <strong>promissory note<\/strong><strong>)<\/strong> is an unconditional written promise by a borrower\u00a0to pay a definite sum of money to the lender <strong>(payee)<\/strong> on demand or on a specific date. On the balance sheet of the lender (payee), a note is a receivable.\u00a0 A customer may give a note to a business for an amount due on an account receivable or for the sale of a large item such as a refrigerator. Also, a business may give a note to a supplier in exchange for merchandise to sell or to a bank or an individual for a loan. Thus, a company may have notes receivable or notes payable arising from transactions with customers, suppliers, banks, or individuals.<\/p>\n<p>Most promissory notes have an explicit interest charge. <strong>Interest<\/strong> is the fee charged for use of money over a period. To the maker of the note, or borrower, interest is an expense; to the payee of the note, or lender, interest is a revenue. A borrower incurs interest expense; a lender earns interest revenue. For convenience, bankers sometimes calculate interest on a 360-day year; we calculate it on that basis in this text. (Some companies use a 365-day year.)<\/p>\n<p>The basic formula for computing interest is:<\/p>\n<p><strong>\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 Principal x Interest Rate x Frequency of a year<\/strong><\/p>\n<p><strong>Principal<\/strong> is the face value of the note. The interest r<strong>ate<\/strong> is the annual stated interest rate on the note. Frequency of a year is the amount of time for the note\u00a0and can be either days or months.\u00a0 We need the frequency of a year because the interest rate is an annual rate and we may not want interest for an entire year but just for the time period of the note.<\/p>\n<p>To show how to calculate interest, assume a company borrowed $20,000 from a bank. The note has a principal (face value) of\u00a0 $20,000, an annual interest rate of 10%, and a life of 90 days. The interest calculation is:<\/p>\n<p>$20,000 principal x 10% interest rate x (90 days \/ 360 days) = $500<\/p>\n<p><em>Note that in this calculation we expressed the time period as a fraction of a 360-day year because the interest rate is an annual rate and the note life was days.\u00a0 If the note life was months, we would divide\u00a0by 12 months for a year.<\/em><\/p>\n<p>The <strong>maturity date<\/strong> is the date on which a note becomes due and must be paid. Sometimes notes require monthly installments (or payments) but usually all of the principal and interest must be paid at the same time. The wording in the note expresses the maturity date and determines when the note is to be paid. A note falling due on a Sunday or a holiday is due on the next business day. Examples of the maturity date wording are:<\/p>\n<ul>\n<li>On demand. \u201cOn demand, I promise to pay\u2026\u201d When the maturity date is on demand, it is at the option of the holder and cannot be computed. The holder is the payee, or another person who legally acquired the note from the payee.<\/li>\n<li>On a stated date. \u201cOn\u00a0July 18, 2015, I promise to pay\u2026\u201d When the maturity date is designated, computing the maturity date is not necessary.<\/li>\n<li>At the end of a stated period.<\/li>\n<\/ul>\n<p>(a<em>)\u201dOne year after date, I promise to pay\u2026\u201d<\/em> When the maturity is expressed in years, the note matures on the same day of the same month as the date of the note in the year of maturity.<\/p>\n<p>(b<em>)\u201dFour months after date, I promise to pay\u2026\u201d<\/em> When the maturity is expressed in months, the note matures on the same date in the month of maturity. For example, one month from\u00a0July 18 is August 18, and two months from\u00a0 July 18 is\u00a0 September 18. If a note is issued on the last day of a month and the month of maturity has fewer days than the month of issuance, the note matures on the last day of the month of maturity. A one-month note dated\u00a0 January 31, matures on February 28.<\/p>\n<p>(c)\u00a0 \u201c<em>Ninety days after date, I promise to pay\u2026\u201d<\/em> When the maturity is expressed in days, the exact number of days must be counted. The first day (date of origin) is omitted, and the last day (maturity date) is included in the count. For example, a 90-day note dated\u00a0 October 19 matures on\u00a0 January 17 of the next year, as shown here:<\/p>\n<table>\n<tbody>\n<tr>\n<td><strong>Life of note (days)<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>90 days<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>Days remaining in October not counting date of origin of note:<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>Days to count in October (31 \u2013 19)<\/strong><\/td>\n<td><strong>12<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>Total days in November<\/strong><\/td>\n<td><strong>30<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>Total Days in December<\/strong><\/td>\n<td><strong>31<\/strong><\/td>\n<td><strong>73<\/strong><\/td>\n<\/tr>\n<tr>\n<td>\n<p><strong>Maturity date in January<\/strong><\/p>\n<p>(90 total days &#8211; 73 days from Oct to Dec)<\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>17 days<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>Sometimes a company receives a note when it sells high-priced merchandise; more often, a note results from the conversion of an overdue account receivable. When a customer does not pay an account receivable that is due, the company may insist that the customer\u00a0 gives a note in place of the account receivable. This action allows the customer more time to pay the balance due, and the company earns interest on the balance until paid. Also, the company may be able to sell the note to a bank or other financial institution.<\/p>\n<p>To illustrate the conversion of an account receivable to a note, assume that Price Company\u00a0 had purchased\u00a0$18,000 of merchandise on August 1 from Cooper Company on account. The normal credit period has elapsed, and Price cannot pay the invoice. Cooper agrees to accept Price\u2019s\u00a0$18,000, 15%, 90-day note dated September 1 to settle Price\u2019s open account. Assuming Price paid the note at maturity and both Cooper and Price have a December 31 year-end, the entries on the books of Cooper are:<\/p>\n<div>\n<table>\n<tbody>\n<tr>\n<td>\n<p>&nbsp;<\/p>\n<p><strong>Aug<\/strong><\/td>\n<td>\n<p>&nbsp;<\/p>\n<p><strong>1<\/strong><\/td>\n<td>\n<p>&nbsp;<\/p>\n<p><strong>Accounts Receivable\u2014Price Company\u00a0<\/strong><\/td>\n<td style=\"text-align: center\">\n<p><strong>Debit<\/strong><\/p>\n<p><strong>18,000<\/strong><\/td>\n<td style=\"text-align: center\">\n<p><strong>\u00a0Credit<\/strong><\/p>\n<p>&nbsp;<\/td>\n<\/tr>\n<tr>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>Sales<\/strong><\/td>\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\n<td style=\"text-align: center\"><strong>18,000<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>To record sale of merchandise on account.<\/strong><\/td>\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>Sept.<\/strong><\/td>\n<td><strong>1<\/strong><\/td>\n<td><strong>Notes Receivable\u00a0<\/strong><\/td>\n<td style=\"text-align: center\"><strong>18,000<\/strong><\/td>\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>Accounts Receivable\u00a0<\/strong><\/td>\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\n<td style=\"text-align: center\"><strong>18,000<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>\u00a0To record exchange of a note from Price Company for open account.<\/strong><\/td>\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>Nov.<\/strong><\/td>\n<td><strong>30<\/strong><\/td>\n<td><strong>Cash\u00a0<\/strong><\/td>\n<td style=\"text-align: center\"><strong>18,675<\/strong><\/td>\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>Notes Receivable<\/strong><\/td>\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\n<td style=\"text-align: center\"><strong>18,000<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>Interest Revenue [18,000 x 15% x (90\/360)]<\/strong><\/td>\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\n<td style=\"text-align: center\"><strong>675<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>\u00a0To record receipt of Price Company note principal and interest.<\/strong><\/td>\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\n<td style=\"text-align: center\"><strong>\u00a0<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p><em>\u00a0Note:\u00a0 Maturity date calculated as November 30 since it was a 90 day note &#8211; 29 days left in September (30 days in Sept &#8211; note day Sept 1) &#8211; 31 days in October leaves 30 days remaining in November.<\/em><\/p>\n<p>The\u00a0$18,675 paid by Price to Cooper is called the <strong>maturity value<\/strong> of the note. Maturity value is the amount that the\u00a0company (maker)\u00a0must pay on a note on its maturity date; typically, it includes principal and accrued interest, if any.<\/p>\n<p>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.<\/p>\n<p><span style=\"color: #ff0000\">\u00a0<\/span><\/p>\n<p>A <strong>dishonored note<\/strong> 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.<\/p>\n<p>At the maturity date of a note, the maker is responsible for the principal plus interest. 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\u2019s face value and Interest Revenue for the interest.<\/p>\n<table>\n<tbody>\n<tr>\n<td><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<\/tr>\n<tr>\n<td>\n<p>&nbsp;<\/p>\n<p><strong>Nov.<\/strong><\/td>\n<td>\n<p>&nbsp;<\/p>\n<p><strong>30<\/strong><\/td>\n<td>\n<p>&nbsp;<\/p>\n<p><strong>Accounts Receivable\u2014Price Company <\/strong><\/td>\n<td>\n<p><strong>Debit<\/strong><\/p>\n<p><strong>18,675<\/strong><\/td>\n<td>\n<p><strong>\u00a0Credit<\/strong><\/p>\n<p>&nbsp;<\/td>\n<\/tr>\n<tr>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>Notes Receivable <\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>18,000<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>Interest Revenue <\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>675<\/strong><\/td>\n<\/tr>\n<tr>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>To record dishonor of Price Company note.<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<td><strong>\u00a0<\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<p>&nbsp;<\/p>\n<p>&nbsp;<\/p>\n<h1>\u00a0Accounting in the Headlines<\/h1>\n<h3 class=\"title\">How does Square account for the amounts it loans to small\u00a0businesses?<\/h3>\n<div class=\"entry\">\n<p><a href=\"https:\/\/wtietz.files.wordpress.com\/2015\/04\/square-reader.jpg\"><img loading=\"lazy\" decoding=\"async\" class=\"size-medium wp-image-1358\" src=\"https:\/\/wtietz.files.wordpress.com\/2015\/04\/square-reader.jpg?w=300&amp;h=264\" alt=\"picture of Square reader\" width=\"300\" height=\"264\" \/><\/a><\/p>\n<p><a href=\"https:\/\/squareup.com\/\">Square<\/a>, the mobile payments company, allows small businesses to take credit cards by swiping customer credit cards using a small square device attached to the audio jack found on mobile devices. Since its founding in 2009 and the launch of its first app in 2010, Square has found its way into many small businesses \u2013 and large businesses.\u00a0 Starbucks uses Square to process transactions with credit or debit card customers.\u00a0 In November 2014, Square announced that it would be accepting Apple Pay. Whole Foods uses Square in select locations.<\/p>\n<p>Square has recently gotten into lending money to its customers through its <a href=\"https:\/\/squareup.com\/capital?gclid=Cj0KEQjwpM2pBRChsZCzm_CU0t4BEiQAxDVFmlgr93b9rx3j8f1oNzBJ4TYsmKpRMTNs_EsMKMDAr8AaAqoa8P8HAQ&amp;pcrid=40961487337&amp;pdv=c&amp;pkw=square+capital&amp;pmt=e\">Square Capital<\/a> program.\u00a0 According to Business Insider (<a href=\"http:\/\/www.businessinsider.com\/square-capital-loaned-out-100-million-to-small-businesses-2015-4\">April 15, 2015 article<\/a>), Square has paid out over $100 million in small business financing over the past year.<\/p>\n<p>See Jack Dorsey, co-founder of Square, explain the small business loan concept in this CNN Money video (2:26 minutes) at <a href=\"http:\/\/money.cnn.com\/video\/technology\/2014\/05\/28\/t-square-capital-dorsey.cnnmoney\/\">http:\/\/money.cnn.com\/video\/technology\/2014\/05\/28\/t-square-capital-dorsey.cnnmoney\/<\/a> \u00a0Essentially, the business owner clicks on a link in the Square Capital app to let Square know that the business would like to borrow a certain amount of money. \u00a0Square Capital calls this step \u201crequesting capital.\u201d The next morning, the funds are deposited in the checking account of that business. \u00a0\u00a0The business pays Square back the funds by having a certain percentage of each day\u2019s receipts deducted for the payback.<\/p>\n<p>For example, if a business wants to borrow $7,000, Square might charge a total of $7,910 for the loan.\u00a0 Upon approval, the $7,000 is deposited into the business\u2019s checking account the next day and then Square charges 9% of the business\u2019s credit card sales each day until the $7,910 is fully paid.\u00a0 Square says that the advantage of this percentage-of-sales method is that the business does not have to make large payments when business is slow. The percentage that Square charges stays constant until the loan is paid off fully.<\/p>\n<p>Square determines the amount to be charged for the loan and the percentage to be charged each day using data analytics.\u00a0 Each Square account has potentially different terms based on its history and trends.<\/p>\n<p><strong>Questions<\/strong><\/p>\n<ol>\n<li>Square Capital states that the first step for business owners is to \u201crequest capital.\u201d Are the business owners actually requesting capital?<\/li>\n<li>In the example given in the blog post, the business borrows $7,000 and pays back $7,910 by paying 9% of its credit card receipts each day until paid in full. Is the 9% the interest rate charged? Why or why not?<\/li>\n<li>Is the amount of cash deposited by Square Capital in its customers\u2019 (the small businesses requesting funds) checking accounts classified as ACCOUNTS RECEIVABLE or NOTES RECEIVABLE by Square Capital? Explain.<\/li>\n<li>What is the difference between the amount of funds deposited in the customers\u2019 accounts and the total amount paid back by customers classified as by Square Capital?<\/li>\n<li>What do you think of this practice by Square Capital?<\/li>\n<\/ol>\n<\/div>\n<\/div>\n<p><iframe src=\"https:\/\/lumenoea.herokuapp.com\/assessments\/load?src_url=https:\/\/lumenoea.herokuapp.com\/api\/assessments\/1182.xml&#38;results_end_point=https:\/\/lumenoea.herokuapp.com\/api&#38;assessment_id=1182&#38;confidence_levels=true&#38;enable_start=true&#38;eid=https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/chapter\/accounting-for-notes-receivable\/\" frameborder=\"0\" style=\"border:none;width:100%;height:100%;min-height:400px;\"><\/iframe><\/p>\n\n\t\t\t <section class=\"citations-section\" role=\"contentinfo\">\n\t\t\t <h3>Candela Citations<\/h3>\n\t\t\t\t\t <div>\n\t\t\t\t\t\t <div id=\"citation-list-142\">\n\t\t\t\t\t\t\t <div class=\"licensing\"><div class=\"license-attribution-dropdown-subheading\">CC licensed content, Shared previously<\/div><ul class=\"citation-list\"><li>Accounting Principles: A Business Perspective.. <strong>Authored by<\/strong>: James Don Edwards, University of Georgia &amp; Roger H. Hermanson, Georgia State University. . <strong>Provided by<\/strong>: Endeavour International Corporation.. <strong>Project<\/strong>: The Global Text Project.. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by\/4.0\/\">CC BY: Attribution<\/a><\/em><\/li><li>How does Square account for the amounts it loans to small businesses?. <strong>Authored by<\/strong>: Dr. Wendy Tietz, CPA, CMA, CGMA. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"http:\/\/www.accountingintheheadlines.com\/\">http:\/\/www.accountingintheheadlines.com\/<\/a>. <strong>License<\/strong>: <em><a target=\"_blank\" rel=\"license\" href=\"https:\/\/creativecommons.org\/licenses\/by-nc\/4.0\/\">CC BY-NC: Attribution-NonCommercial<\/a><\/em><\/li><\/ul><div class=\"license-attribution-dropdown-subheading\">All rights reserved content<\/div><ul class=\"citation-list\"><li>Interest Bearing Notes Receivable. <strong>Authored by<\/strong>: NotePirate. <strong>Located at<\/strong>: <a target=\"_blank\" href=\"https:\/\/youtu.be\/DDWmiuUKUFc\">https:\/\/youtu.be\/DDWmiuUKUFc<\/a>. <strong>License<\/strong>: <em>All Rights Reserved<\/em>. <strong>License Terms<\/strong>: Standard YouTube License<\/li><\/ul><\/div>\n\t\t\t\t\t\t <\/div>\n\t\t\t\t\t <\/div>\n\t\t\t <\/section>","protected":false},"author":1195,"menu_order":5,"template":"","meta":{"_candela_citation":"[{\"type\":\"copyrighted_video\",\"description\":\"Interest Bearing Notes Receivable\",\"author\":\"NotePirate\",\"organization\":\"\",\"url\":\"https:\/\/youtu.be\/DDWmiuUKUFc\",\"project\":\"\",\"license\":\"arr\",\"license_terms\":\"Standard YouTube License\"},{\"type\":\"cc\",\"description\":\"Accounting Principles: A Business Perspective.\",\"author\":\"James Don Edwards, University of Georgia & Roger H. Hermanson, Georgia State University. \",\"organization\":\"Endeavour International Corporation.\",\"url\":\"\",\"project\":\"The Global Text Project.\",\"license\":\"cc-by\",\"license_terms\":\"\"},{\"type\":\"cc\",\"description\":\"How does Square account for the amounts it loans to small businesses?\",\"author\":\"Dr. Wendy Tietz, CPA, CMA, CGMA\",\"organization\":\"\",\"url\":\"http:\/\/www.accountingintheheadlines.com\/\",\"project\":\"\",\"license\":\"cc-by-nc\",\"license_terms\":\"\"}]","CANDELA_OUTCOMES_GUID":"","pb_show_title":"on","pb_short_title":"","pb_subtitle":"","pb_authors":[],"pb_section_license":""},"chapter-type":[],"contributor":[],"license":[],"class_list":["post-142","chapter","type-chapter","status-web-only","hentry"],"part":133,"_links":{"self":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/142","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapters"}],"about":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/wp\/v2\/types\/chapter"}],"author":[{"embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/wp\/v2\/users\/1195"}],"version-history":[{"count":8,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/142\/revisions"}],"predecessor-version":[{"id":2210,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/142\/revisions\/2210"}],"part":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/parts\/133"}],"metadata":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapters\/142\/metadata\/"}],"wp:attachment":[{"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/wp\/v2\/media?parent=142"}],"wp:term":[{"taxonomy":"chapter-type","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/pressbooks\/v2\/chapter-type?post=142"},{"taxonomy":"contributor","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/wp\/v2\/contributor?post=142"},{"taxonomy":"license","embeddable":true,"href":"https:\/\/courses.lumenlearning.com\/tcc-financialaccounting\/wp-json\/wp\/v2\/license?post=142"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}