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Promissory Notes

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EXERCISES ON DISCOUNTING OF NOTES

I. DISCOUNTING OF NOTES RECEIVABLE

1. Determination of Interest and Maturity Date (use 360 days for interest)

Date of Note Principal Rate Term Maturity Date Interest


A 8/5/2021 ₱60,000.00 12% 80 10/24/2021 1,600.00
B 5/10/2021 84,000.00 16% 90 8/8/2021 3,360.00
C 10/1/2020 120,000.00 18% 45
D 7/1/2021 45,000.00 14% 60
E 9/15/2021 90,000.00 17% 75 11/29/2021 3,187.50

2. Determination of Interest and Maturity Value (use 360 days for interest)
Additional assumptions:
Principal Rate Term Interest Maturity Value Date of Note
A ₱540,000.00 11.90% 2 years 128,520.00 ₱668,520.00 8/5/2021
B 337,500.00 8.40% 10 months 8/6/2021
C 1,250,000.00 12.50% 5 months 65,104.17 ₱1,315,104 10/20/2021
D 910,000.00 9.25% 2.5 years 8/8/2021
E 750,000.00 14% 45 days 13,125.00 ₱763,125 8/9/2021

3. Determination of Maturity Date and Maturity Value, Discount Period Net proceeds, and Gain/Loss on Discounting (use 360

Principal Interest Rate Date of Note Term Maturity Date Interest


(days)
A ₱40,000.00 10.40% 12/12/2021 50 1/31/2022 577.78
B 55,000.00 13.50% 6/17/2021 69 8/25/2021 1,423.13
C 25,000.00 12% 3/4/2022 70 days
D 6,000,000.00 10.00% 6/7/2021 90 9/5/2021 150,000.00
E 15,000.00 15% 5/13/2022 80 days

Date of Discount Discount Discount Net Proceeds


Discounting Period Rate
A 1/19/2021 12 15% ₱202.89 ₱40,374.89
B 7/22/2021 34 13.70% 730.05 55,693.07
C 4/1/2015 13%
D 7/31/2021 36 12.00% 73,800.00 6,076,200.00
E 7/9/2022 17%

Net Proceeds Principal Accrued Carrying Gain/(Loss) on


Interest Amount Discounting
A ₱40,374.89 40,000.00 ₱439.11 ₱40,439.11 (₱64.22)
B 55,693.07 55,000.00 721.88 55,721.88 (28.80)
C - 25,000.00
D 6,076,200.00 6,000,000.00 90,000.00 6,090,000.00 (13,800.00)
E - 15,000.00

II. DISCOUNTING OWN NOTE (use 360 days for interest)

Discount(d) /
Principal Discount Rate Term Prepaid Interest Net Proceeds
A ₱100,000.00 12% 60 days
B 150,000.00 10.50% 45 days 1,969.00 148,031.00
C 60,000.00 7.50% 1 year
D 80,000.00 4% 6 months 1,600.00 78,400.00
E 200,000.00 15% 1.5 years 45,000.00 155,000.00
Interest (I)= Principal (P) x Rate (R) x Time or Term (T)
P = I / RT
R = I / PT

T = (I / PR) x 360 (if # of days; x12 if in months)

nal assumptions:
Maturity Date Maturity Value (MV) = Interest (I) + Principal (P)
8/5/2023 I = MV - P

3/20/2022 P = MV - I

9/23/2021

Loss on Discounting (use 360 days for interest)

Maturity Value Date of Discount Discount Discount Net Proceeds


Discounting Period Rate
₱40,577.78 1/19/2022 12 15.00% ₱202.89 ₱40,374.89
56,423.13 7/22/2021 34 13.70% ₱730.05 ₱55,693.07
4/1/2015 0 13.00% ₱0.00 ₱0.00
6,150,000.00 7/31/2021 36 12.00% ₱73,800.00 ₱6,076,200.00
7/9/2022 0 17% ₱0.00 ₱0.00

Sample computation of discount & accrual period: Discount (D) = Maturity Value (MV) x Discount Rate (DR) x D
Dec 19 MV = D / (DR x DP)
Jan 31 50 days DR = D / (MV x DP)
Discount period 12 DP = D / ((MV x DR) x 360)

Accrual period 38 (Term of Note - Disct Period)

Date of note Disct Date Maturity Date Accrued Interest (AI) =


12-Dec 19-Jan 31-Jan
ACCRUAL PERIOD DISCOUNT PERIOD Carrying Amount (CA) =
38 12
50 Gain (Loss) on Discounting =

Discount (d) = Principal (P) x Discount Rate (DR) x Term (T)


Accrued Carrying Gain/(Loss) on
Interest Amount Discounting
₱439.11 ₱40,439.11 (₱64.22)
₱721.88 ₱55,721.88 (₱28.80)
₱0.00 ₱0.00 ₱0.00
₱90,000.00 ₱6,090,000.00 (₱13,800.00)
₱0.00 ₱0.00 ₱0.00

y Value (MV) x Discount Rate (DR) x Discount Period (DP)

V x DR) x 360)

Accrued Interest (AI) = Principal (P) x Interest Rate (R) x Accrual Period (AP)

Carrying Amount (CA) = Principal (P) + Accrued Interest (AI)


Gain (Loss) on Discounting = Net proceeds (NP) - Carrying Amount (CA)
JOURNAL ENTRIES:
1. When business entity receives a promissory note for a sale transaction. (Case B)
Notes Receivable 84,000.00
Sales 84,000.00
To record sales in exchange for promissory note

2. Upon collection from customer on the maturity date:


Cash 87,360.00
Notes Receivable 84,000.00
Interest Income 3,360.00

#3-D:
Entry upon receipt of promissory note on 6/7/21, as settlement of an open account
6/7/2021 Notes Receivable 6,000,000.00
Account Receivable 6,000,000.00
To record receipt of promissory note in settlement of AR

7/31/2021 Cash 6,076,200.00


Loss on Discounting NR 13,800.00
Notes Receivable Discounted 6,000,000.00 (presented as Contra-Notes Receivable Acct
Interest Income 90,000.00
To record discounting of promissory note - with recourse

9/5/2021 The customer defaulted (or dishonored) on settlement of promissory note


Notes Receivable Discounted 6,000,000.00
Accounts Receivable 6,150,000.00
Cash 6,150,000.00 (maturity value of the note, because this is
Notes Receivable 6,000,000.00

9/5/2021 The customer paid or honored the maturity of promissory note


Notes Receivable Discounted 6,000,000.00
Notes Receivable 6,000,000.00

9/5/2021 Assuming that the note was not discounted, and the customer honored the maturity of the promissory not
Cash 6,150,000.00
Notes Receivable 6,000,000.00
Interest Income 150,000.00

Entries for NP discounting (CASE E)


1/1/2021 Cash 155,000.00
Prepaid Interest 45,000.00
Notes Payable 200,000.00

12/31/2021 Interest Expense 30,000.00


Prepaid Interest 30,000.00

Upon payment:
6/30/2022 Notes Payable 200,000.00
Cash 200,000.00

Interest Expense 15,000.00


Prepaid Interest 15,000.00

ALTERNATIVELY, IF NOTE WAS NOT DISCOUNTED:


Cash 200,000.00
Notes Payable 200,000.00

UPON PAYMENT:
Notes Payable 200,000.00
Interest Expense 45,000.00
Cash 245,000.00
#3-D:
Entry upon receipt of promissory note on 6/7/21
6/7/2021 Notes Receivable 6,000,000.00
Account Receivable 6,000,000.00
To record receipt of promissory note in settlement of AR

7/31/2021 Cash 6,076,200.00


Loss on Discounting NR 13,800.00
d as Contra-Notes Receivable Acct) Notes Receivable 6,000,000.00
Interest Income 90,000.00
To record discounting of promissory note - without recourse

9/5/2021 The customer defaulted (or dishonored) on settlement of promissory note


NO ENTRY - the bank takes the necessary course of action against the maker

value of the note, because this is what the bank expects to collect)

9/5/2021 The customer paid or honored the maturity of promissory note


NO ENTRY - the Notes Receivable account was already closed upon discounting

he maturity of the promissory note:


missory note
nst the maker

upon discounting

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