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 contract, what we see is that the note receivable, different from AR, right? And another difference here is that they have a maturity date, so there's going to 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 going to be an interest rate and you're earning interest on this note receivable, you're going to be getting interest revenue. Okay, so we have 2 things, we've got principal, 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 principal 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 going to pay us interest for borrowing that money.

So when we calculate interest, we're going to use a very simple formula. We're going to have the face value of the note, the principal, right? This is the principal amount and we're going to multiply it by this interest rate. They're going to give us an interest rate in the question. So this is generally going to have to be given and we're also going 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 going to be current, they're going to be things like a note receivable that's for, you know, 90 days or 6 months, or maybe 1 year or 9 months, right? They are generally pretty short terms. So what happens is we're not going to earn in most cases a full year of interest, right? If it's a 90-day note receivable, well, we're only going to earn interest for 90 days, not a whole year. So we're going to have to multiply the interest rate which is usually given or which is pretty much always given as an annual amount and we have to multiply it to give it for 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 $1800 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 principal, 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 going to 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 going to calculate the total interest on that loan. Let's see what it is. $1800 times 0.12. 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. Alright? 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 $2000, 8%, but notice this time it's in months, not days, and not years. So we're still going to multiply the principal, $2000 times the interest rate 8% which is 0.08, but now we're going to multiply by the time factor. This time it's 9 months, right? We still don't get a whole year's worth, we get 9 months, months but we're talking in months. So we're not going to talk about 360 days anymore, we're going to talk about 12 months. So in this case, we're going to have it for 9 out of the 12 months, right? So let's see how much total interest will be earned in this case. Well, we've got $2000 times 0.08, so in a whole year, there would have been a $160 worth of interest, but we only get 9/12ths of it. Times 9 divided by 12 is $120, so there would be a $120 total interest in this case. Alright.

Last but not least, let's try this last one. $45100 times 4.5%, so don't get tripped up with the decimal there, 4.5%, 0.045. Right? 0.045 times, well, in this case, it's out for 1 year, right? So it would just be 1 times one over 1. It's out for 1 full year, so it would just be 1. That doesn't matter. Alright. So $45100 times 0.045 did I do that right? $45100 times 0.045. 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.