In this case, the company that is the holder of the note should make the journal entry for the dishonored note receivable. The dishonored note receivable journal entry is for the company to convert its form from the notes receivable to the accounts receivable. Likewise, the outstanding balance of the dishonored note receivable together with its interest receivable will be transferred to accounts receivable. The company usually converts the dishonored note receivable to the accounts receivable in order to mark the dishonored note and separate it from those of the collectible notes receivable.
The bank lets the endorser know about the non-payment of the note receivable and the endorser is charged protest fees for legal fees. If the debtor will not likely pay the debt, such as when the debtor declares bankruptcy, disappears or has debts that are beyond the statute of limitations, the crediting company generally writes the debt off as operating expenses.
When the note is dishonored, the business can either have the customer sign a new note or send the note back to Accounts Receivable. When transferred back to Accounts Receivable, the customer not only owes the amount of the note, but also owes interest. The note is considered reclassified, but the debt is not canceled.
The amount of time that it takes the customer to pay the note affects how much interest the customer will owe. The business must calculate the number of days from the maturity of the debt to the payment date, calculate the interest income, record the total payment into the account receivable, record the additional interest income and enter the cash received.
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Home Chapter 7: Accounts Receivable. The basic stated amount of a note on which interest is usually calculated; generally relating to the amount borrowed. Did you learn? What is the difference between an account receivable and a note receivable?
Be able to define terms related to notes e. Be able to account for the various phases in the life cycle of a note, including issuance, interest accruals, and maturity. Know how to account for the dishonor of a note.
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