Dishonored Note Receivable
Overview
Dishonored note receivable is the note receivable that has already reached maturity, but the debtor or borrower does not pay back the amount owed. 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. This also helps the company to easily keep track of the dishonored notes and make a better decision regarding the credit term or credit policy in the future.
Dishonored note receivable journal entry
The company can make the dishonored note receivable journal entry by debiting the accounts receivable and crediting the notes receivable account and interest receivable account.
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 000 | |
| Notes receivable | 000 | |
| Interest receivable | 000 |
Dishonored note receivable example
For example, on December 31, 2020, the company ABC has the note receivable of $10,000 that has been dishonored due to it has already reached maturity but no payment has been received yet. Also, the $500 of interest receivable belongs to such note.
In this case, the company ABC can make the journal entry to transfer the total amount due including the interest receivable from such dishonored note receivable to account receivable as below:
| Account | Debit | Credit |
|---|---|---|
| Accounts receivable | 10,500 | |
| Notes receivable | 10,000 | |
| Interest receivable | 500 |
It is useful to note that if the company anticipates that the dishonored note receivable is unlikely to be collectible, it should make the allowance for doubtful accounts for such note after transferring it to the accounts receivable. This is so that the company’s total assets reflect its net realizable value.