![]() If the note is not paid and was discounted without recourse, no further entry is needed. If a contra account is used, a journal entry similar to the following one should be made: If the original entry has a credit to the regular notes receivable account, no entry is needed when the note is paid in full by its maker. This approach is not commonly applied in practice. This account balance can be shown in the balance sheet as a deduction from all notes receivable. However, since the holder is contingently liable for paying the maturity value to the bank, it may be appropriate to use a contra account, "Notes Receivable-Discounted." For Example 1, this journal entry would be made as follows: This approach is usually suitable if the discount on notes receivable is with recourse, as long as the disclosure of the contingent liability is made either parenthetically or in a footnote (e.g., stating that the note will be paid when it matures). That is to say, if the original holder is without further liability, then the asset is effectively transferred and its amount should be removed from the books. This approach is always appropriate if the discounting takes place without recourse. The example entries show the credit being made directly to the notes receivable account, just as if the note had been collected. Step 5: Prepare the journal entry: Disclosures Now, assuming the same facts as in Example 2, suppose that the note is assigned originally on 30 June 20x1. Step 5: Prepare the journal entry: Example 3 Step 1: Compute the maturity value: $102,000 You can assume that all the other facts are the same. Suppose that the same note in Example 1 is discounted on 1 April 20x2 instead of 15 May. Step 5: Prepare the journal entry: Example 2 Step 4: Compute the net interest income or expense: The Sample Company discounts a $100,000 note receivable on 15 May 20x2. In the next examples, this process is applied to calculate the discount on three notes receivable by the Sample Company.
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