Renewal of a Bill of Exchange

Learning Objectives:

1. Make journal entries in the books of drawer and acceptor when the original bill is cancelled and a new bill is drawn on the acceptor.

When the acceptor of a bill finds himself unable to make payment of the bill on the due date; he may request the drawer of the bill, before it is due, to cancel the original bill and draw on him a new bill for an extended period. This is called renewing a bill of exchange. The acceptor has to pay interest for the extension of time. The new bill therefore, includes not only the amount of the original bill but also interest etc. Journal entries in this case are:

Creditor's Books:

In this case first of all entries recording the original bill will to be cancelled. Next entry for interest would be passed. A further entry will be passed for a new bill of exchange.

(a) When the old bill is cancelled:

Personal account of the acceptor [Dr.]

To Bill receivable account [Cr.]

(b) When interest is charged by the drawer:

Personal account of the acceptor [Dr.]

To Interest account [Cr.]

(c) When acceptance on new bill is received:

Bill receivable account [Dr.]

To Acceptor's personal account [Cr.]

Debtor's Books:

Debtor will make the following entries in his books:

(a) When the old bill is cancelled:

Bill payable account [Dr]

To Drawer's account [Cr]

(b) When interest is charged by the drawer:

Interest account [Dr]

To Drawer's account [Cr]

(c) When a fresh bill is accepted:

Drawer's account [Dr]

To bill payable account [Cr]

Example 1:

P draws a bill for $2,000 on Q who accepts and returns it to P. When the bill was about to mature, Q expressed has inability to meet it and request to P to renew it. P agrees but adds $10 to the new bill for interest. Give necessary journal entries in the books of P and Q when the bill is renewed.

Solution:

Journal Entries in the Books of P

Bills receivable account		2,000
To Q			2,000
(Acceptance received)
Q		2,000
To Bills receivable account			2,000
(bill dishonored)
Q		10
To Interest account			10
(Being the interest charged for renewal of a bill)
Bills receivable account		2,010
To Q			2,010
(Being the new bill accepted.)

Journal Entries in the Books of Q

P		2,000
To Bills payable			2,000
(Acceptance given)
Bill payable		2,000
To P			2,000
(bill dishonored - cancelled)
Interest account		10
To P			10
(Being the interest charged for renewal of a bill)
P		2,010
To Bill payable			2,010
(Acceptance given.)

Example 2:

X having accepted a bill for $450 is unable to meet the same. Before the due date, he requests Y, the drawer of the bill, to receive $310 in cash ($10 being for interest) and to draw on him a new bill for a period of 3 months for $150 and cancel the old bill which is about to due. Y agrees to this proposal.
Show the journal entries in the books of X and Y.

Journal Entries in the Books of Y

X		450
To Bills receivable account			450
(old bill cancelled)
Cash account		310
To X			300
To Interest account			10
(Being the amount received from X including interest)
Bills receivable account		150
To Q			150
(Acceptance received)

Journal Entries in the Books of X

Bill payable account		450
To Y			450
(old bill cancelled)
Y		300
Interest account		10
To Cash account			310
(Being the amount received from X including interest)
Y		150
To Bill payable			150
(Acceptance given)

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