• Bank of America reported net income of $14.9 billion in 2007 and $6.3 billion in 2009.
• Bank of America is the No. 1 overall Small Business Administration (SBA) lender in the United
States and the No. 1 SBA lender to minority-owned small businesses.
• Bank of America serves 1 of 2 households in the U.S.
Answers will vary. In addition to borrowed funds, students might bring up stock sales.
2. It is a draft on an account prepared by the bank and made payable to a specific party. The funds for the
check are immediately removed from the account on which the check is written.
3. It becomes a contingent liability when the note is endorsed at the time it is transferred to another
4. Compute the maturity value of the note being discounted. Compute the discount on the maturity value,
6. A dishonored note receivable is a note whose maker has not made payment of principal and interest
and has not worked out plans with the holder of the note on the date the note matures.
8. A note receivable is a signed document that provides better legal protection in the event of default. An
Discussion Questions
Chapter Opener: Thinking Critically
NOTES PAYABLE AND NOTES RECEIVABLE
CHAPTER 16
A strong financial position means that Bank of America was able to take advantage of new business
ventures (like mortgage financing), and broaden product offerings while smaller and less fiscally strong
banks were forced to close.
Fast Facts
Managerial Implications: Thinking Critically
Discussion Questions (continued)
10. Notes payable are almost always given to cover the borrowing of money, especially from a bank
or other financial institution because this is the normal contract for borrowing. Notes are
12. Discounting a note payable means paying interest in advance (through a deduction from the
14. The note is due on May 28.
15. The face amount of a note is the amount shown on the instrument as being the amount borrowed
16. To be negotiable, an instrument must (a) be in writing and signed by the maker, (b) contain an
EXERCISE 16.1
1. October 10, 2013
EXERCISE 16.2
1. MV = P + I
= $14,000 + ($14,000 × 0.06 × 3/12)
EXERCISE 16.3
1. MV = P + I
= $14,000 + ($14,000 × 0.09 × 90/360)
EXERCISE 16.4
PAGE
POST.
REF.
1 2013 1
2 May 8 Cash 22 0 0 0 00 2
3 Notes Payable—Bank 22 0 0 0 00 3
4 Issued 90-day, 7% note 4
5 5
EXERCISE 16.5
PAGE
POST.
REF.
1 2013 1
6 6
GENERAL JOURNAL
DATE DESCRIPTION DEBIT CREDIT
GENERAL JOURNAL
DATE DESCRIPTION DEBIT CREDIT
EXERCISE 16.6
PAGE
POST.
REF.
1 2013 1
2 June 3 Notes Receivable 2 80000 2
EXERCISE 16.7
PAGE
POST.
REF.
1 2013 1
EXERCISE 16.8
PAGE
POST.
REF.
1 2013 1
DEBIT CREDIT
GENERAL JOURNAL
DATE DESCRIPTION DEBIT CREDIT
DATE DESCRIPTION DEBIT CREDIT
GENERAL JOURNAL
GENERAL JOURNAL
DATE DESCRIPTION
PROBLEM 16.1A
1. I = P × R × T
= $20,000 × 0.08 × 180/360 = $800
PROBLEM 16.2A
PAGE
POST.
REF.
1 2013 1
2 May 14 Warehouse Equipment 75 0 0 0 00 2
3 Notes Payable—Trade 75 0 0 0 00 3
4 Issued 6-month, 8% note for 4
5 warehouse equipment 5
6 6
GENERAL JOURNAL
DATE DESCRIPTION DEBIT CREDIT
PROBLEM 16.3A
Note 21 I = $40,000 × 0.10 × 3/12 = $1,000
MV = $40,000 + $1,000 = $41,000
PROBLEM 16.4A
Note 31 Maturity value = $40,000 + ($40,000 × .08 × 6/12)
= $40,000 + $1,600
= $41,600
Discount = $41,600 × 0.10 × 61/360 = $704.89
PROBLEM 16.5A
PAGE
POST.
REF.
1 2013 1
2 May 16 Notes Receivable 7 8 0 0 00 2
3 Accounts Receivable/Vick Company 7 8 0 0 00 3
4 Accepted 90-day, 8% note for 4
5 past-due account 5
6 6
16 16
PROBLEM 16.1B
1. I = P × R × T
= $8,800 × 0.10 × 90/360 = $220
GENERAL JOURNAL
DATE DESCRIPTION DEBIT CREDIT
PROBLEM 16.2B
PAGE
POST.
REF.
1 2013 1
2 June 3 Office Equipment 35 00000 2
3 Notes Payable 35 00000 3
4 Issued 120-day, 9% note for new office 4
5 equipment 5
6 6
PROBLEM 16.3B
I = $12,000 × 0.105 × 60/360 = $210
MV = $12,000 + $210 = $12,210
Note 30
GENERAL JOURNAL
DATE DESCRIPTION DEBIT CREDIT
PROBLEM 16.4B
Note 20 Maturity
v
= $20,000 + ($20,000 × .08 × 120/360)
= $20,000 + $533.33
= $20,533.33
Analyze: The notes receivable would be shown on the balance sheet as:
Notes Receivable $37,000
Less Notes Receivable—Discounted (37,000) −0−
v
PROBLEM 16.5B
PAGE
POST.
REF.
1 2013 (1) 1
12 12
13 13
14 Oct. 2 Notes Receivable—Discounted 9 8 0 0 00 14
15 Notes Receivable 9 8 0 0 00 15
16 To record payment of discounted note 16
GENERAL JOURNAL
DATE DESCRIPTION DEBIT CREDIT
CRITICAL THINKING PROBLEM 16.1
The bookkeeper is incorrect in saying that once a note is discounted it becomes the bank’s problem. When a
business discounts a note at a bank, the business is required to endorse the note and as a result becomes
contingently liable to the bank for the maturity value of the note. If the maker pays the note, the contingent
liability ends. If the maker dishonors the note, the business—as an endorser—must pay the principal and
interest to the bank because the contingent liability becomes a real liability. In almost every case, the bank
assesses a service charge against the endorser to cover the bank’s costs associated with the dishonored note.
Contingent liabilities affect the financial position of the business if future events cause them to become rea
l
liabilities. Therefore, contingent liabilities should be disclosed with all pertinent details on the financial
statements to inform the reader of the risks involved.
CRITICAL THINKING PROBLEM 16.2
PAGE
POST.
REF.
1 2013 1
2 Mar. 4 Cash 1000000 2
3 Notes Payable—Bank 10000 00 3
4 4
5 11 Cash 8 7 7 5 00 5
6 Interest Expense 2 2 5 00 6
7 Notes Payable—Bank 9000 00 7
8 8
9 22 Notes Receivable/Brian Fields 1500000 9
20 28 Notes Receivable/Jason Cobb 450000 20
21 Accounts Receivable/Jason Cobb 450000 21
22 22
23 (a) 23
24 April 18 Notes Payable—Bank 1000000 24
35 Notes Receivable/Brian Fields 1500000 35
36 36
GENERAL JOURNAL
DATE DESCRIPTION DEBIT CREDIT
CRITICAL THINKING PROBLEM 16.2 (continued)
PAGE
POST.
REF.
1 2013 (c) 1
2 April 24 Cash 1815000 2
DATE DESCRIPTION DEBIT CREDIT
GENERAL JOURNAL
SOLUTIONS TO BUSINESS CONNECTIONS
Managerial Focus:
2. Only the owner or top manager should be allowed to borrow money. An individual who has access to
accounting records should not have access to cash before others have made a record of receipts.
Ethical Dilemma:
It is not ethical to hide the contingent liabilities when notes receivable are discounted. If the maker of a
large note defaults on the note, Mills Corporation would be required to pay the bank for the amount of
increasing the uncollectible account expense.
Financial Statement Analysis:
1. 48.2% in 2010 ($10,363 ÷ $21,484); 47.7% in 2009 ($11,153 ÷ 23,387)
Analyze Online:
Teamwork:
Internet Connection:
The Uniform Commercial Code is the set of laws promulgated for state adoption to govern commercial
Part A True-False
1.a. FALSE 7. FALSE
1.c. TRUE 9. FALSE
1.e. FALSE 11. FALSE
2. TRUE 13.a. TRUE
4. FALSE 13.c. FALSE
6. FALSE
Part B Exercises
1.a. Maturity date, 6/8/13
1.b. Maturity date, 8/9/13
3. 2013
Apr. 10 Cash 24,000.00
SOLUTIONS TO PRACTICE TEST