Measurement Issues For Notes Receivable The major reporting and measurement issues associated with accounting for notes receivable are (1) recording the initial receipt of the note and (2) recording the payment of the note and the amount of interest earned. Accounting for Notes Receivable To illustrate accounting for a note receivable, assume the Blair Company received a $3,000, 90-day note with a stated interest rate of 12 percent from a customer. The general journal entry to record this business transaction is: If this note had been received from a customer wishing to extend the payment period on an account receivable, the credit would have been recorded to Accounts Receivable rather than Sales. At the time the note is repaid, the amount of interest due is calculated : The general journal entry to record the payment of the note and the interest by the Blair Company is: Discounting a Note Receivable An additional advantage of receiving a note receivable is that the note may be used to borrow money from the bank. Borrowing money using an existing note is termed discounting the note. When a note receivable is discounted, the amount of cash received is termed the proceeds. This amount is computed as follows: Proceeds = Maturity value - Discount Recall that the maturity value of a note is its face value plus the amount of interest due on the maturity date. The discount is the amount of interest the bank charges for lending money. This amount is deducted from the maturity value of the note used as collateral and is computed as follows: Discount = Maturity value × Discount rate × Discount period Measurement Issues For Notes Receivable Discounted The major recording and measurement issues for notes receivable discounted are (1) determining the maturity value, discount, and pro-ceeds; (2) recording the cash received, interest expense, or interest revenue; and (3) recording the repayment of the note by the maker. Accounting for Notes Receivable Discounted To illustrate accounting for notes receivable discounted, assume that the Hodges Company received a $12,000, 120-day, 10 percent note on May 1, 1992. On May 31, 1992, the note is discounted at the bank at 15 percent. The amount of the proceeds received by Hodges is computed as follows: The difference between the original value of the note receivable ($12,000) and the proceeds received ($11,935) is recorded as either interest expense or interest revenue. Since Hodges received proceeds less than the original face value of the note, the difference is recorded as interest expense of $65 ($12,000 - $11,935). In the event that the proceeds are greater than the original face value of the note receivable, the difference is recorded as interest revenue. Notice that the account Notes Receivable Discounted is credited rather than Notes Receivable. Discounting a note at a bank does not normally remove Hodges from all responsibility for paying the note. In the event that the maker fails to repay the note on the maturity date, Hodges will be liable to the bank for the maturity value of the note. Thus, during the discount period the note is a contingent liability (pos-sible liability) to Hodges. Notes Receivable Discounted is a contra account that is deducted from Notes Receivable on the balance sheet. When a discounted note is paid by the maker, both the Notes Receivable and Notes Receivable Discounted accounts are removed from the accounting records. For example, Hodges records the following general journal entry when the note is paid on August 29, 1992 :