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Our note in favor of C. D. Gordon, dated February 3, for three months, for $460, with interest at 6%, would be entered in the journal, on February 3, as follows:

C. D. Gordon, $460

To Notes Payable, $460

When the business pays this note on May 3, the effect would be as follows:

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As an entry on the Cash Payments, it would be made as follows:

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Rule for Interest. Debit the Interest account when the business allows it to others.

Credit the Interest account when others allow it to the business. Exercise 20. Enter the following transactions on journal paper. The transactions may be used as an oral exercise before writing them. 1. May 1. Received C. E. Bowen's note for $720, payable in 10 days, with interest at 6%.

3. Gave C. I. Bell my note for $240, payable in 15 days, with interest at 6%.

5. Gave W. A. Worth my note for $900, payable in 15 days, with interest at 6%.

11. C. E. Bowen paid his note in transaction 1, with interest, $1.20. 12. Received F. A. Hunt's note for $75, payable in 10 days, with interest at 6%.

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18. Paid my note in transaction 2 and interest, 60¢.

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20. Paid my note in transaction 3 and interest.

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15. S. D. Dale gave the business his note for $480, payable in 15 days, with interest at 8%.

22. F. A. Hunt paid his note in transaction 5, with interest.
30. Received payment of S. D. Dale's note and interest in
transaction 6.

Others' Notes Discounted. To discount a note at a bank or with a broker is to sell the note and pay in advance for the use of the money.

It is, in effect, borrowing the face value of the note for the unexpired time of the note. The business receives the use of the money for the time from the date of discount to the date of maturity. This is called the term

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Problem: S. N. Gray's note for $625, dated May 8, payable in 60 days, is discounted at the bank on June 16 at 6%. The value of the note would be found as follows:

Date of Maturity, July 7.

Term of discount, from June 16 to July 7, is 21 days.

The discount (interest in advance) of $625, for 21 days at 6% is $2.19. $625 minus $2.19 is $622.81, the proceeds of the note. The bank will deduct the $2.19 as interest on the $625 for 21 days and give the difference, $622.81, to the person discounting the note.

The effect on the accounts would be as follows:

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Since discount on a note is interest on the note paid in advance, but one account called Interest will be kept for both interest and discount.

In entering it in the cash book, the entry must be made on the theory that $625 was received for the face of the note and $2.19 paid for the use of the money. The entry would be as follows:

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Our Notes Discounted. The business may borrow money from a bank or a broker on its own note. A note is issued and the interest paid in advance by subtracting the discount for the time of the note from the face of the note.

Our note, payable in 60 days, for $225, discounted at the bank at 6% would be entered on the Cash Receipts as a credit to Notes Payable for $225 and on the Cash Payments as a debit to Interest for $2.25.

Rule for Discount on Notes. Debit Interest for all discount allowed by the business on our notes and on others' notes.

Credit Interest for all discount allowed to the business on our notes. and on others' notes.

Interest account is a nominal account and shows a profit if the credit

side is the larger and a loss if the debit side is the larger. It should be closed as follows:

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Exercise 21. Find the discount and the proceeds of the following notes:

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Exercise 22. On journal paper enter the following transactions in a cash book.

June 2. Received payment of S. N. Gordon's note for $325, and

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20.

interest for 30 days at 6%.

Paid note favor C. E. Betts for $415, and interest for 90 days at 6%.

Discounted at the bank at 6%, B. E. Bond's note for $350, dated May 31, payable 30 days after date.

Paid note favor C. N. Briggs, for $265, and interest for 45 days at 6%.

Discounted at the bank at 6%, our note for $1500, payable 60 days after June 15.

Discounted at the bank at 6%, C. N. Good's note for $97.50, dated May 27, payable 60 days after date.

24. Received payment of B. E. Reed's note for $450.90, and interest for three months at 5%.

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28.

Discounted at the bank at 7%, our note for $1750, payable 30 days after June 27.

By agreement with the payee of our note, C. S. Boden, we prepay our note for $250, dated June 15, for 30 days, less discount for the unexpired time at 6%.

What account should be debited for the face value of the note?

What account should be credited for the discount?

June 30. Paid C. D. Griffin the quarterly interest on a note for $1825 in his favor, dated March 30, payable one year after date, with interest at 6% per annum, payable quarterly.

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