Promissory Notes
Quiz 2 scope: Units 4.1–4.6. Read the three unit reviewers, practice each unit, then use the mixed mock for a complete rehearsal.
Read the promise from each side
The maker issues the note and records Notes payable, a liability. The payee receives the note and records Notes receivable, an asset. A note formalizes a written promise to pay a specified amount at a specified future date.
The same promise is an obligation for the maker and a right to collect for the payee. Replacing an ordinary account with a note changes the form of the debt; it does not mean cash was paid or new revenue was earned.
Interest and maturity value
Interest = Principal × Annual rate × Time
For a day term, use time = days / 360 in this course.
For a month term, use time = months / 12.
Convert a rate such as 7% to 0.07.
For an interest-bearing note, maturity value = principal + interest.
For a stated non-interest-bearing face-value note in the introductory example, no explicit interest is added. Do not invent a discount or financing adjustment when none is given.
The annual rate prices one year's use of the principal. A shorter term earns only that fraction of the annual interest: 90/360 = 0.25 year, and 3/12 = 0.25 year. Interest is the borrowing charge; maturity value is the total due, so do not substitute one for the other.
Entries
Event | Maker | Payee |
|---|---|---|
Issue/receive note for cash | Dr Cash; Cr Notes payable | Dr Notes receivable; Cr Cash |
Replace a trade account | Dr Accounts payable; Cr Notes payable | Dr Notes receivable; Cr Accounts receivable |
Settle interest-bearing note | Dr Notes payable and Interest expense; Cr Cash | Dr Cash; Cr Notes receivable and Interest income |
Dishonor at maturity, course treatment | Dr Notes payable and Interest expense; Cr Accounts payable | Dr Accounts receivable; Cr Notes receivable and Interest income |
If interest has already been accrued, clear the relevant payable or receivable and recognize only the additional interest for the new period. Do not record the entire lifetime interest twice.
For example, if full-term interest is ₱500 and ₱300 was already recorded as Interest payable, additional Interest expense at payment is ₱500 − ₱300 = ₱200. The payment clears Interest payable ₱300 as well as Notes payable; charging ₱500 as new expense would count the earlier ₱300 twice.
Try the note cases
All amounts are Philippine pesos (₱). Rates below are annual; use simple interest, days/360 or months/12, as appropriate. No interest has previously been accrued or received. Find full-term interest and maturity value. For Sam, also record the payee’s dishonor entry; for Anna, record the payee’s collection at maturity.
Case | Principal | Annual rate | Term | Event |
|---|---|---|---|---|
Example | 50,000 | 4% | 90 days | Interest-bearing note |
Payable case 1 | 60,000 | 5% | 120 days | Maker settles at maturity |
Payable case 2 | 120,000 | 7% | 3 months | Maker settles at maturity |
Sam | 10,400 | 10% | 45 days | Payee’s note is dishonored at maturity |
Anna | 20,000 | 12% | 2 months | Payee collects cash at maturity |
Worked workbook examples
Note | Interest calculation | Interest | Maturity value |
|---|---|---|---|
₱50,000, 4%, 90 days | 50,000 × 0.04 × 90/360 | ₱500 | ₱50,500 |
₱60,000, 5%, 120 days | 60,000 × 0.05 × 120/360 | ₱1,000 | ₱61,000 |
₱120,000, 7%, 3 months | 120,000 × 0.07 × 3/12 | ₱2,100 | ₱122,100 |
Sam: ₱10,400, 10%, 45 days | 10,400 × 0.10 × 45/360 | ₱130 | ₱10,530 |
Anna: ₱20,000, 12%, 2 months | 20,000 × 0.12 × 2/12 | ₱400 | ₱20,400 |
Sam's dishonor becomes a debit to Accounts receivable of ₱10,530, with credits to Notes receivable ₱10,400 and Interest income ₱130. Anna's collection debits Cash ₱20,400 and credits Notes receivable ₱20,000 and Interest income ₱400.
Dishonor does not cancel the amount owed. Under the supplied course entry, Sam still owes principal plus the ₱130 earned interest, so ₱10,400 + ₱130 = ₱10,530 moves to an ordinary receivable. No Cash debit is made because he did not pay. Anna does pay: her ₱20,400 cash consists of repayment of the ₱20,000 principal plus ₱400 income; treating all of it as income would overstate earnings.
Check the period
When counting a term from a date, the workbook excludes the issue date and begins with the following day. Distinguish the full note term from the elapsed time used in an adjustment. Accrued interest before maturity must not exceed total term interest.
Common mistakes
Use an annual rate with a fraction of a year, not with 90 as the time factor. Keep principal separate from interest. Classify a note using the due-date facts: a note is not automatically long-term just because it is written.
Quiz 2 focus: Unit 4.5
The released Quiz 2 sets test interest, maturity value, maturity dates, note-account removal and dishonor from the correct party's perspective. Dates and the 360-day interest denominator answer different questions. Use actual calendar days to locate a maturity date, but divide the stated day term by 360 to calculate course interest. Do not pretend every calendar month has 30 days.
A five-step note checklist
Identify the viewpoint: maker owes; payee collects.
Identify the transaction: cash loan, new sale/service, or conversion of an existing account.
Separate face value, annual interest, time and total maturity value.
Count the maturity date using the stated term; exclude the issue date and include the due date.
Write the complete entry and verify that cash or the new ordinary account equals the principal plus earned interest.
A note received directly for today's service is not an Accounts receivable increase. The payee debits Notes receivable and credits Service revenue. A customer giving a note to replace last month's unpaid bill instead causes Dr Notes receivable; Cr Accounts receivable, with no second revenue credit. A maker buying equipment by note debits Equipment rather than Cash.
Original worked note: both parties, one obligation
On August 19, 2026, Luntian Studio buys equipment for ₱144,000 and issues a 75-day, 8% annual note to Kubo Equipment. There are no prior interest accruals. Use a 360-day year. This example isolates the note settlement; Kubo's own inventory/cost entries are outside the requested note analysis.
Interest = 144,000 × 0.08 × 75/360 = ₱2,400. Maturity value = 144,000 + 2,400 = ₱146,400. Annual interest is ₱11,520; only 75/360 of a year is owed. The note account carries the ₱144,000 principal, not ₱146,400.
For the maturity date, August has 31 − 19 = 12 remaining days; September contributes 30; October contributes 31. That is 73 days, so the last two days fall on November 2, 2026. The day count is 12 + 30 + 31 + 2 = 75.
Stage | Maker: Luntian Studio | Payee: Kubo Equipment |
|---|---|---|
August 19 issuance | Dr Equipment 144,000; Cr Notes payable 144,000 | Dr Notes receivable 144,000; Cr Sales 144,000 for this direct sale |
November 2 payment | Dr Notes payable 144,000; Dr Interest expense 2,400; Cr Cash 146,400 | Dr Cash 146,400; Cr Notes receivable 144,000; Cr Interest income 2,400 |
November 2 dishonor, alternative to payment | Dr Notes payable 144,000; Dr Interest expense 2,400; Cr Accounts payable 146,400 | Dr Accounts receivable 146,400; Cr Notes receivable 144,000; Cr Interest income 2,400 |
Payment and dishonor are alternative outcomes, not consecutive entries. Dishonor records no cash. The debt remains payable/collectible as an ordinary account under the course treatment. Crediting Accounts receivable in the maker's books confuses the creditor with the debtor.
Explain the equation effects
At payment, the maker's Cash decreases ₱146,400, liability decreases ₱144,000 and equity decreases ₱2,400 through Interest expense. The principal repayment is not an expense. In the payee's books, Cash rises ₱146,400 while Notes receivable falls ₱144,000, so net assets and equity rise ₱2,400, not ₱146,400. These statements assume interest has not already been accrued.
At dishonor, the maker's Notes payable falls ₱144,000 and Accounts payable rises ₱146,400: net liabilities rise ₱2,400 and equity falls by the interest expense. On the payee's side, moving the principal between asset accounts alone creates no income; the additional earned interest explains the ₱2,400 net asset increase.
Calendar-day and month-term drills
Original facts | Count or calculation | Result |
|---|---|---|
60-day note issued December 12, 2026 | December: 19 days; January: 31; February: 10 | February 10, 2027 |
90-day note issued February 12, 2027, a non-leap year | February: 16; March: 31; April: 30; May: 13 | May 13, 2027 |
Six-month note issued March 15, 2026 | Six calendar months after March 15 | September 15, 2026 |
₱96,000 at 7.5% for eight months | 96,000 × 0.075 × 8/12 | ₱4,800 interest; ₱100,800 maturity value |
₱84,000 at 9% for 50 days | 84,000 × 0.09 × 50/360 | ₱1,050 interest; ₱85,050 maturity value |
For a year-end “already matured?” question, calculate each due date before comparing with the reporting date. A six-month term is not interchangeable with a stated 180-day term. Questions involving a missing corresponding month-end need an explicit convention; these drills avoid that ambiguity.
Answer the named account, not the largest amount
A ₱96,000, 7.5%, eight-month note is collected at maturity with no previous accrual. If asked for Cash debit, answer ₱100,800. If asked for Notes receivable credit, answer ₱96,000. If asked for Interest income credit, answer ₱4,800. These three figures belong to the same entry; the wording determines the answer.
For an amount already accrued, separate old recognition from new recognition. If total interest is ₱4,800 and ₱1,800 is already in Interest receivable, collection is Dr Cash 100,800; Cr Notes receivable 96,000; Cr Interest receivable 1,800; Cr Interest income 3,000. This is an extension for avoiding double counting; full adjusting-entry preparation is not the priority for the stated Quiz 2 coverage.
Source wording that needs care
The released Term 3 trial-balance question uses “Accrued Rent Expense” for a liability balance. Read it as Rent payable when that meaning is explicitly supplied; do not infer that every account containing the word expense has a debit balance. Likewise, a maturity value is not the note's carrying face amount, and a dishonored payable does not become the maker's receivable.
Final self-check
Check that interest is positive and sensible relative to one year's interest, interest plus principal equals maturity value, the correct party owns the receivable, the principal is removed exactly once, and any previously accrued interest is cleared without being earned or expensed twice. For numeric answers use pesos without the currency symbol; for a date use an unambiguous written month, day and year.
Sources
FDNACCT Unit 4.5_Journalizing transactions specific to promissory notes_Study Guide.pdf, pp. 1–2
FDNACCT Unit 4.5_Journalizing transactions specific to promissory notes_Class Exercise.xlsx, Examples; Sheet1
FDNACCT Unit 4.7_Journalizing and posting adjusting entries_Study Guide.pdf, pp. 1–5; FDNACCT_Formula Guide_Quiz #3.pdf
FDNACCT_2526_T1_Quiz #2_1_Questionnaire.pdf; question patterns and independently checked course methods
FDNACCT_2526_T1_Quiz #2_3_Solutions to PS.pdf; question patterns and independently checked course methods
FDNACCT_2526_T2_Quiz #2_1_Questionnaire.pdf; question patterns and independently checked course methods
FDNACCT_2526_T2_Quiz #2_2_Answer Key_updated.pdf; question patterns and independently checked course methods
FDNACCT_2526_T2_Quiz #2_3_Solutions to PS.pdf; question patterns and independently checked course methods
FDNACCT_2526_T3_Quiz #2_1_Questionnaire.pdf; question patterns and independently checked course methods
FDNACCT_2526_T3_Quiz #2_3_Solutions to PS.pdf; question patterns and independently checked course methods