 ## Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

7. Receivables and Investments

# Notes Receivable

Notes Receivable are a type of receivable that earns the company interest revenue.

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## Notes Receivable Definitions 6m
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Alright. So let's learn a few more details about notes receivable. So recall that a note receivable is very similar to an account receivable except that it's supported by a formal written contract. Okay. We have a formal written contract which kind of solidifies this arrangement and on top of there being this this contract, what we see is that the note receivable uh different from a. R. Right. Another difference here is that they have a maturity date. So there's gonna be a specific date where the note receivable matures and has to be paid back and they earn interest. Okay. That's a big difference there is that there's gonna be an interest rate and you're earning interest on this note receivable, you're gonna be getting interest revenue. Okay. So we have two things. We've got principle. If you've heard of loans you've probably heard these terms before. You've got the principal of the loan and this is the amount that was loaned or borrowed. Right? We've got notes receivable and notes payable. So it goes either way. The principle is that amount that's loaned or borrowed and the interest. Well that's the cost of borrowing the principal. Right? So if we lent money they're gonna pay us interest for for borrowing that money. So when we calculate interest we're gonna use a very simple formula. We're gonna have the face value of the note the principal, right? This is the principal amount. And we're gonna multiply it by this interest rate they're gonna give us an uh an interest rate in the question. So this is generally gonna have to be given And we're gonna have to multiply it by a time factor. Usually these notes receivable are for short terms for the most part when we talk about notes receivable, they're gonna be current. They're gonna be things like a note receivable that's for you know, 90 days or six months or maybe one year, nine months. Right? They're generally pretty short terms. So what happens We're not gonna earn in most cases a full year of interest. Right? If it's a 90 day note receivable, we're only going to earn interest for 90 days, not a whole year. So we're gonna have to multiply the interest rate which is usually given or which is pretty much always given as a annual amount. And we have to multiply it to give it for the actual amount the actual time period. So let's see some examples here with the interest rate. The first one, we've got a note that's \$1,800 note with a 12% interest rate, annual interest rate and it's out for 90 days. So let's calculate the total interest that will be paid on this note. What we need to do is we need to multiply the principle the face value of the note times the interest rate 0.12 as a percentage, right? As a decimal. And then we have to multiply it by the time factor, right? This time factor that I mentioned. Well in this case we're not having it for a whole year, right? We're only gonna have it for a portion of the year. And when we talk about days, they usually simplify, they don't talk about 365 days. They usually just say 360 just to keep it simple double check with your professor and make sure they use 360. It just makes the math a lot simpler in these classes. So we don't get it for a whole year for a whole 360 days. We only get it for 90 out of those 360 days. Okay? So this is how we're gonna calculate the total interest on that loan. Let's see what it is, 1800 times .12. So \$216 would be for an entire year. But we're only having it for 90 days of the year. So 90 times 90, divided by 360, gives us \$54. All right. So you should have got \$54 total interest for those 90 days outstanding. Alright, let's try the next one. So now we've got \$2,000 8. But notice this time it's in months, not days and not years. So we're still gonna multiply the principal 2000 times the interest rate 8%, which is 0.08. But now we're gonna multiply by the time factor this time it's nine months, right? We still don't get a whole year's worth. We get nine months. But we're talking in months. So we're not gonna talk about 360 days anymore. We're gonna talk about 12 months. So in this case we're gonna have it for nine out of the 12 months, right? So let's see how much total interest will be earned in this case. What we've got 2000 times 20000.8. So in a whole year there would have been 100 and \$60 worth of interest. But we only get 9 12 times nine, divided by 12 is 100 and \$20. So there would be 100 \$20 total interest in this case. All right. Last but not least. Let's try this last 1. 40 500 Times 4.5%. So don't get tripped up with the decimal there. 4.5%.. Right? 0.045 times. Well, in this case it's out for one year. Right? So it would just be one times 1/1. It's out for one full year. So, it would just be one. That doesn't matter. Alright, so 4500 times 45000.45. Did I do that right? 4500 times 45000.45. There it is \$202.50. That's the total interest on that one. Alright, So that's how we calculate interest. Let's go ahead and pause real quick and then we'll discuss maturity date in the next video.
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## Notes Receivable:Calculating the Maturity Date 2m
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So like I said notes receivable have two distinct features that accounts receivable don't, there's uh the interest that we just learned how to calculate and the maturity date, there's gonna be a specific date that it's do just like we saw it's going to be doing 90 days. It's gonna be doing nine months, right? That is the due date. So how do we find that due date? Well the maturity date like I said the day the day the note is due and on that due date they're gonna pay the principal plus the interest, everything gets paid on the due date. Okay. They don't pay the interest ahead of time, generally it all happens on the due date. Alright. So let's see how do we find the maturity date of of a note? Okay. They'll they'll usually make you do this and you want to make sure that when you count days, you don't count the day the issue date the very first day. But you do count the maturity date the last day. Okay. It's very simple to do this. So let's go ahead and do this. Find the maturity date of a 60 day note uh issued on July 17. So on july 17th we need to think of how many days are left in the month. Okay So what we do is we're gonna do july 31 minus 17 right? There's 31 total days in july 17 that we're not counting. So 31 minus 17 equals 14 days in july And then how about August August, well we're looking for 60 total days. The whole month of August isn't gonna include that. So that's gonna be another 31 days in August, so that's 31 days now. How many total days do we have so far? 45 days so far? Right. So that means there's we're not gonna get through an entire other month, right? There's only 60 total days on this note. So we want to find out what the last day is gonna be. It's gonna be sometime in September, right? And it's gonna be how many days are left? There's 60 total -45. Well, it's 15 days into September and that is going to be our answer september 15. Okay. So notice how we did that. If it was a longer note, we would have to count a few more months. Right. But you want to keep tally of how many days you've already expired and how many days are left for that final month where it does get paid. Alright, let's go ahead and move on to the next video
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## Notes Receivable:Acquiring and Disposing 7m
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## Notes Receivable:Interest Receivable Adjusting Entry 6m
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