C hapter 15: Bills of exchange

Contents of chapter
This chapter examines the nature and uses of bills of exchange. It also explains how to enter transactions of bills
of exchange in the books.

Notes for teachers

Bills of exchange are used mainly in foreign trade.
1

The main difficulties that students find concern (i) discounting charges, and (ii) noting charges.
2
Remember that:

(i) Discounting charges are solely the expenses of the drawer. They are treated like any other expenses.

(ii) Noting charges are incurred because the drawee has not paid the bill. They are not expenses of the
drawer even though he has to pay for them. The payment is therefore not charged to an expense
account. It is charged to the drawee’s (i.e. the debtor’s) account.
Dr Drawee’s account (the debtor)
Cr Bank account

A dishonoured bill means that:

3
(i) The bill receivable cannot be honoured on the maturity date.
(ii) The drawee (debtor) still owes money for the goods.

To amend the books we must therefore:

Dr Drawee’s account (debtor) — because he still owes the money.
Cr Bills receivable account — to cancel it.

Contingent liabilities:
4
These do not involve entries in the books. All that is needed is a note on the balance sheet to warn
readers of the possible liabilities.

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Answers to MCQs and exercises
15.1 B 15.2 B 15.3 D 15.4 A

15.5
In Chan’s book
(Dates omitted)
T Mei
$ $
Balance b/f 570 Bills receivable (1) 570

Bills Receivable
$ $
T Mei (1) 570 Bank (2) 570

Bank
$
Bills receivable (2) 570

15.6
In Au’s Books
(Dates omitted) K Wong
$ $
Balance b/f 880 Bills receivable (1) 880

Bills Receivable
$ $
K Wong (1) 880 Bank (2a) 880

Bank
$ $
Bills receivable (2a) 880 Discounting charges (2b) 22

Discounting Charges
$
Bank (2b) 22
(No entries required for (3) in Au’s book.)

15.7
In Kin’s Books
(Dates omitted) K Mok
$ $
Balance b/f 950 Bills receivable (1) 950
Bank: Dishonoured bill (3) 950
Bank: Noting charges (4) 10

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 Bills Receivable
$ $
K Mok (1) 950 Bank (2a) 950

Bank
$ $
Bills receivable (2a) 950 Discounting charges (2b) 19
K Mok: Dishonoured bill (3) 950
K Mok: Noting charges (4) 10

Discounting Charges
$
Bank (2b) 19

15.8
In Yiu’s books
K Poon
$ $
Balance b/f 1,920 Bills receivable (1) 1,920
Bank: Dishonoured bill (3) 1,920 Bills receivable (6) 1,995
Bank: Noting charges (4) 15
Interest receivable (5) 60
1,995 1,995

Bills Receivable
$ $
K Poon (1) 1,920 Bank (2a) 1,920
K Poon (6) 1,995 Bank (7) 1,995

Bank
$ $
Bills receivable (2a) 1,920 Discounting charges (2b) 28
Bills receivable (7) 1,995 K Poon: Dishonoured bill (3) 1,920
K Poon: Noting charges (4) 15

Discounting Charges
$
Bank (2b) 28

Interest Receivable
$
K Poon (5) 60

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15.9X
Advantages of drawing up a bill of exchange:
(1) It acts as a proof of debt.
(2) It can be used to pass on to another party as payment of the drawer’s account.
(3) It can be discounted with the bank and get immediate cash.
(4) It acts as a reminder to Fong what payment on maturity and his obligations are. The bill cannot be left
outstanding, without penalties.

15.10X
(a) In Hong’s books
L Yau
20X3 $ 20X3 $
May 1 Sales 96,000 May 1 Bills receivable 96,000
Sep 1 Bank: Dishonoured bill 96,000 Sep 3 Bills receivable 96,600
" 3 Bank: Noting charges 50
" 3 Interest receivable 550
96,600 96,600

Bills Receivable
20X3 $ 20X3 $
May 1 L Yau 96,000 Jun 1 Bank 96,000
Sep 3 L Yau 96,600 Nov 30 Bank 96,600

Sales
20X3 $
May 1 L Yau 96,000

Bank
20X3 $ 20X3 $
Jun 1 Bills receivable 96,000 Jun 1 Discounting charges
3
Nov 30 Bills receivable 96,600 ($96,000 × 5% × ) 1,200
12
Sep 1 L Yau: Dishonoured bill 96,000
" 3 L Yau: Noting charges 50

Discounting Charges
20X3 $
Jun 1 Bank 1,200

Interest Receivable
20X3 $
Sep 3 L Yau 550

15.11X
(a) In AF Ltd’s books
Sales
20X4 $
Jun 1 K Leung ($1,600 × 20) 32,000

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 (b) Bank
20X4 $ 20X4 $
Jun 2 Bills receivable 32,000 Jun 2 Discounting charges 1,050
Oct 8 K Leung 8,000 Oct 1 K Leung: Dishonoured bill 32,000
" 1 K Leung: Noting charges 400
20X5
Jan 15 K Leung 10,000

(c) Bills Receivable

20X4 $ 20X4 $
Jun 1 K Leung 32,000 Jun 2 Bank 32,000
20X5
Oct 8 K Leung 25,010 Jan 8 K Leung: Dishonoured bill 25,010

(d) K Leung
20X4 $ 20X4 $
Jun 1 Sales 32,000 Jun 1 Bills receivable 32,000
Oct 1 Bank: Dishonoured bill 32,000 Oct 8 Bank 8,000
" 1 Bank: Noting charges 400 " 8 Bills receivable 25,010
" 8 Interest receivable
3
[($32,400 – $8,000) × 10% × ] 610
12
33,010 33,010
20X5 20X5
Jan 8 Bills receivable: Dishonoured bill 25,010 Jan 15 Bank 10,000
" 15 Bad debts 15,010
25,010 25,010

(e) Bad Debts

20X5 $
Jan 15 K Leung 15,010

15.12
(a) In L Sze’s books
Purchases Ledger
K Yuen
20X8 $ 20X8 $
Mar 2 Bills payable 8,750 Mar 1 Balance b/f 8,750
Jun 6 Bills payable 9,128 Jun 6 Bills payable: Dishonoured 8,750
Interest payable ($280 + $98) 378
9,128 9,128

General Ledger
Bills Payable
20X8 $ 20X8 $
Jun 6 K Yuen: Bill dishonoured 8,750 Mar 2 K Yuen 8,750
" 30 Balance c/f 9,128 Jun 6 K Yuen 9,128

Interest Payable
20X8 $
Jun 6 K Yuen 378

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(b) In K Yuen’s Books
Sales Ledger
J Ting
20X8 $ 20X8 $
Mar 1 Balance b/f 16,100 Mar 2 Bills receivable (Bill 1) 16,100
16,100 16,100

L Sze
20X8 $ 20X8 $
Mar 1 Balance c/f 8,750 Mar 2 Bills receivable (Bill 2) 8,750
Jun 6 Bank: Bill 2 dishonoured 8,750 Jun 6 Bills receivable (Bill 5) 9,128
" 6 Bank: Noting charges 98
" 6 Bank: Interest receivable 280
9,128 9,128

Purchases Ledger
B Wan
20X8 $ 20X8 $
Mar 3 Bills payable (Bill 3) 11,200 Mar 1 Balance b/f 11,200

Y Pau
20X8 $ 20X8 $
Mar 3 Bills payable (Bill 4) 5,600 Mar 1 Balance b/f 7,000
" 6 Bank 1,400
7,000 7,000
General Ledger

Bills Receivable
20X8 $ 20X8 $
Mar 2 J Ting (Bill 1) 16,100 Mar 4 Bank (Bill 1) 16,100
" 2 L Sze (Bill 2) 8,750 " 5 Bank (Bill 2) 8,750
Jun 6 L Sze (Bill 5) 9,128 Jun 30 Balance c/f 9,128
33,978 33,978

Bills Payable
20X8 $ 20X8 $
May 3 Bank (Bill 3) 11,200 Mar 3 B Wan (Bill 3) 11,200
" 3 Bank (Bill 4) 5,600 " 3 Y Pau (Bill 4) 5,600
16,800 16,800

Bank
20X8 $ 20X8 $
Mar 5 Bills receivable (Bill 1) 16,100 Mar 5 Discounting charges (Bill 1) 210
" 5 Bills receivalbe (Bill 2) 8,750 " 5 Discounting charges (Bill 2) 140
" 6 Y Pau 1,400
May 3 Bills payable (Bill 3) 11,200
" 5 Bills payable (Bill 4) 5,600
Jun 6 L Sze: Bill 2 dishonoured 8,750
Noting charges (Bill 2) 98

Discounting Charges
20X8 $
Mar 5 Bank (Bill 1) 210
" 5 Bank (Bill 2) 140

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 Interest Receivable
20X8 $
Jun 6 L Sze 280

15.13X
(a) In Kenny’s books
Bills Receivable
20X4 $ 20X4 $
Jan 4 Fan (Bill No. 1) 3,000 Jan 5 Yuen 3,000
Fan (Bill No. 2) 2,000 " 5 Bank (Bill No. 2) 1,920
" 7 Soo (Bill No. 3) 4,600 Bills discounting charges 80
Soo (Bill No. 4) 4,600 " 8 Bank (Bill No. 3) 4,460
Apr 3 Fan (Bill No. 5) 2,015 Bills discounting charges 140
May 7 Bank (Bill No. 4) 4,600
" 8 Balance c/f 2,015
16,215 16,215

(b) Bills Discounting Charges

20X4 $
Jan 5 Bills receivable (Bill No. 2) 80
" 8 Bills receivable (Bill No. 3) 140

(c) Sales Ledger

Fan
20X4 $ 20X4 $
Jan 1 Balance b/f 5,000 Jan 4 Bills receivable (Bill No. 1) 3,000
Apr 1 Bank: " 4 Bills receivable (Bill No. 2) 2,000
Bills dishonoured 2,000 Apr 3 Bills receivable (Bill No. 5) 2,015
Noting charges 15
7,015 7,015

(d) Soo
20X4 $ 20X4 $
Jan 1 Balance b/f 9,200 Jan 7 Bills receivable (Bill No. 3) 4,600
" 7 Bills receivable (Bill No. 4) 4,600
9,200 9,200
(e) Purchases Ledger

Yuen
20X4 $ 20X4 $
Jan 5 Bills receivable (Bill No. 1) 3,000 Jan 1 Balance b/f 3,560
" 5 Bank 560
3,560 3,560

(f) Bank
20X4 $ 20X4 $
Jan 1 Balance b/f 6,886 Jan 5 Yuen 560
" 5 Bills receivable (Bill No. 2) 1,920 Apr 1 Fan: Bills dishonoured 2,000
" 8 Bills receivable (Bill No. 3) 4,460 Noting charges 15
May 7 Bills receivable (Bill No. 4) 4,600 May 7 Balance c/f 15,291
17,866 17,866

140
15.14

(a) (i) Purchases Ledger Control

20X1 $ 20X1 $
Dec 31 Discounts received 900 Jan 1 Balance b/f 12,000
Payments to creditors 125,000 Dec 31 Purchases 120,800
Sales ledger: Set off 2,000
Balance c/f 4,900
132,800 132,800

(ii) Sales Ledger Control

20X1 $ 20X1 $
Jan 1 Balance b/f 24,000 Dec 31 Receipt from debtors 170,300
Dec 31 Sales 189,000 Purchases ledger: Set off 2,000
Interest charged to debtors 180 Balance c/f 40,880
213,180 213,180

(b) Mr Fung’s Ledger

Mr Chan
20X1 $ 20X1 $
Nov 1 Balance b/f 90,000 Nov 1 Bills receivable 90,000

Mr Lee
20X1 $ 20X1 $
Nov 1 Balance b/f 46,000 Nov 22 Bills receivable 46,000
Dec 22 Bills receivable: Bill dishonoured 46,000 Dec 31 Balance c/f 46,000

Bills Receivable
20X1 $ 20X1 $
Nov 1 Mr Chan (Bill No. 1) 90,000 Nov 8 Bank 87,000
Bank interest 3,000
90,000 90,000
20X1 20X1
Nov 22 Mr Lee (Bill No. 3) 46,000 Dec 22 Mr Lee: Bill dishonoured 46,000

Bills Payable
20X1 $ 20X1 $
Dec 15 Bank 78,000 Nov 15 Mr Cheung (Bill No. 2) 78,000

141