Notes receivable and card sales

Learning goals

• Calculate note interest and maturity value using exact terms.
• Record note issuance, accrued interest, collection, and dishonour.
• Record credit/debit-card sales net of processing fees while separating HST.
• Compare the liquidity and risk of trade receivables, notes, and card receivables.

Prerequisite check

Simple interest uses principal × annual rate × time. A 90-day note normally uses 90/365 unless the question explicitly says a 360-day year. Keep full precision until the final rounded dollar or cent.

Vocabulary

• Promissory note: written promise to pay a stated amount under stated terms.
• Principal: face amount of the note.
• Maturity date: date principal and interest are due.
• Maturity value: principal plus total interest due.
• Dishonoured note: note not paid at maturity.
• Merchant fee: processor charge for handling card transactions.

Core idea

A note replaces an informal account with a formal interest-bearing claim. Interest is earned with time, not only at collection. Card sales create faster, often lower-risk cash settlement, but the processor's fee is a selling/processing cost.

Why this treatment makes sense

Separating principal from interest distinguishes repayment of the claim from the return earned for waiting. Separating HST from revenue prevents tax collected for the government from inflating sales. Recognizing the processor fee shows the true cost of accepting the card.

A repeatable method

1. Draw a timeline from issue date through reporting date to maturity.
2. Compute interest for each reporting period: P × r × days/365.
3. At issue, transfer Accounts Receivable to Notes Receivable if applicable.
4. At period-end, accrue earned but uncollected interest.
5. At maturity, collect principal plus all interest and remove related receivables.
6. For card sales, start with the customer's full invoice, then separate revenue, HST, processor receivable/cash, and fee.

Worked example

On November 1, Boreal Bikes accepts a $12,000, 6%, 120-day note from a customer whose account is overdue. At December 31, 60 days have passed. Use 365 days.

Interest accrued = $12,000 × 6% × 60/365 = $118.36.

Table: Note acceptance and year-end interest accrual

Total 120-day interest = $236.71, so maturity value is $12,236.71. At collection, debit Cash $12,236.71; credit Notes Receivable $12,000; credit Interest Receivable $118.36; credit Interest Revenue $118.35 for the remaining 60 days (rounding creates the one-cent difference).

For a card sale of $1,000 plus $130 HST with a 2.5% fee on the full $1,130 charge, the fee is $28.25 and cash/processor receivable is $1,101.75. Debit Cash $1,101.75 and Card Processing Expense $28.25; credit Sales Revenue $1,000 and HST Payable $130.

Journal, ledger, and statement connection

At December 31 the note and interest receivable are separate current assets if collection is expected within a year. Interest revenue increases profit as time passes. Card fees reduce profit, while HST Payable is a liability and never part of card revenue.

Common mistakes

• Applying the interest rate to maturity value instead of principal.
• Counting months when the note states days, or using 360 without instruction.
• Recognizing all interest at issue rather than over time.
• Charging the card fee only on pre-tax sales when the processor charges the full transaction.
• Leaving a dishonoured note in Notes Receivable after the formal note has expired.

Guided practice

A $9,000, 8%, 60-day note matures. Interest is $9,000 × 8% × 60/365 = $118.36; maturity value is $9,118.36. If dishonoured and collection is still expected, debit Accounts Receivable $9,118.36; credit Notes Receivable $9,000 and Interest Revenue $118.36.

Independent practice

1. Calculate interest and maturity value for a $15,000, 5%, 90-day note using 365 days.
2. A $2,400 sale plus HST is settled through a processor charging 2% of the total. Record the entry assuming immediate deposit.
3. Explain why accepting a note can strengthen evidence of a claim without eliminating credit risk.

Self-check and solutions

1. Interest = $15,000 × 5% × 90/365 = $184.93; maturity value = $15,184.93.
2. HST is $312; customer charge $2,712; fee $54.24; cash $2,657.76. Debit Cash $2,657.76 and Card Processing Expense $54.24; credit Sales Revenue $2,400 and HST Payable $312.
3. The note documents principal, rate, and due date and may support enforcement, but the maker may still be unable or unwilling to pay. Collectibility must still be assessed.

Retrieval practice

1. What creates Interest Revenue: issue, passage of time, or collection only?
2. Is a card fee a reduction of HST payable?
3. What happens to a dishonoured note still expected to be collected?

Answers: passage of time; no, it is an expense; transfer principal and interest to Accounts Receivable.

Exam-style application

At year-end a controller omits $420 accrued interest on a note. Identify four effects. Solution: Interest Receivable, total assets, Interest Revenue, profit, and equity are each understated $420; cash is unaffected. (The question asks for four, but listing the linked fifth effect demonstrates the full chain.)

Lesson summary

Notes separate principal from time-based interest; card sales trade a processing fee for faster settlement. A timeline, exact rate basis, and HST separation keep both types of transaction accurate.