Accounting: The Language of Business (Part 46)

“To get qualified accountants, it’s extremely difficult.” —Craig Scott

Receivables (Part E)

by

Charles Lamson

Accounting for Notes Receivable

As mentioned in an earlier post, a note may be received from a customer to replace an account receivable. To illustrate, assume that a 30-day, 12% note dated November 21, 2023, is accepted in settlement of the account of W. A. Bunn Co., which is past due and has a balance of $6,000. The entry to record the transaction is as follows:

When the note matures, the entry to record the receipt of $6,060 ($6,000 principal plus $60 interest) is as follows:

If the maker of a note fails to pay the debt on the due date, the note is a dishonored note receivable. When a note is dishonored, the face value of the note plus any interest due is transferred to the accounts receivable account. For example, assume that the $6,000, 30-day, 12% note received from W. A. Bunn Co. and recorded on November 21 is dishonored at maturity. The entry to transfer the note and the interest back to the customer's account is as follows:

The interest of $60 has been earned, even though the note has been dishonored. If the account receivable is uncollectible, the amount of $6,060 will be written off against the Allowance for Doubtful Accounts.

If a note matures in a later fiscal period, the interest accrued in the period in which the note is received must be recorded by an adjusting entry. For example, assume that a 90-day, 12% note dated December 1, 2023, is received from Crawford Company to settle its account, which has a balance of $4,000. Assuming that the accounting period ends on December 31, the entries to record the receipt of the note, accrued interest, and payment of the note at maturity are shown below.

The interest revenue account is closed at the end of each accounting period. The amount of interest revenue is normally reported in the Other Income section of the income statement.

Receivables on the Balance Sheet

All receivables that are expected to be realized in cash within a year are presented in the Current Assets section of the balance sheet. It is normal to list the assets in the order of their liquidity. This is the order in which they are expected to be converted to cash during normal operations. An example of the presentation of receivables is shown in the partial balance sheet for Crabtree Co. in Exhibit 5.

EXHIBIT 5 Receivables on Balance Sheet

The balance of Crabtree's notes receivable, accounts receivable, and interest receivable accounts are reported in Exhibit 5. The allowance for doubtful accounts is subtracted from the accounts receivable. Alternatively, the accounts receivable may be listed on the balance sheet at its net realizable value of $430,000, with a note showing the amount of the allowance. If the allowance account includes provisions for doubtful notes as well as accounts, it should be deducted from the total of notes receivable and accounts receivable.

Other disclosures related to receivables are presented either on the face of the financial statements or in the accompanying notes. Such disclosures include the market (fair) value of the receivables. In addition, if unusual credit risks exist within the receivables, the nature of the risks should be disclosed. For example, if the majority of the receivables are due from one customer or are due from customers located in one area of the country or one industry, these facts should be disclosed. 

*WARREN, REEVE, & FESS, 2005, ACCOUNTING, 21ST ED., PP. 328-330*

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