The debit impact of the transaction is recording receipt of the principal and the interest income. Since $200,000 has been collected at the end of the month along with interest income. The credit impact provides a breakup of the cash received on the debit side. If the note receivable is due within a year, it’s treated as a current asset, treated as non-current assets. Record the conversion of the account receivable balance to note receivable. Among these, one customer with a $5,000 wants to convert the balance to a note receivable.

BWW has a customer, Waterways Corporation, that tends to have larger purchases that require an extended payment period. On January 1, 2018, Waterways purchased merchandise in the amount of $250,000. BWW agreed to lend the $250,000 what are notes receivable purchase cost (sales price) to Waterways under the following conditions. The conditions of the note are that the principal amount is $250,000, the maturity date on the note is 24 months, and the annual interest rate is 12%.

Accrued interest on notes receivable

This interest is in addition to the principal amount and earnings for the holder of the promissory note. Notes can be converted to cash by discounting them to the financial institutions. If the maker dishonors the note, the company discounting the note pays to the financial institutions. After a year, ABC Co. must record the receipt when the customer repays the loan.

The Bullock Company’s journal entries for 1 November 2019, 31 December 2019, and 31 January 2020 are shown below. In some cases, the term of the note is expressed in days, and the exact number of days should be used in the interest computation. In this example, interest is based on the fact that the note has been outstanding for 62 days. This period of time is important in calculating the interest charges related to the notes. In some industries, it is common for a seller to insist on a note rather than an open account for certain types of sales.

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For note receivable, the timeframe is before or on which the maker must reimburse the holder. Unlike other loans, note receivables do not usually come with prepayment penalties. As at 31 December, the note receivable from ABC is classified as a non-current asset because it is due after 12 months from 31 December. Interest receivable on the note as a 31 December is reported as current asset because it is to be received at the end of April 20X5.