Discounting, Dishonour, Renewal and Insolvency of a Bill of Exchange
On 1 January 2024, Ravi sold goods to Suresh for ₹1,20,000 and drew a three-month bill of exchange on him for the full amount. Suresh accepted the bill on the same day. On 4 March 2024 Ravi discounted the bill with his bank at 12% per annum. The bill was dishonoured on maturity, and the bank paid noting charges of ₹500. Ravi settled the bank's claim and agreed to Suresh's request for renewal. A new bill for two months was drawn for the amount due plus interest of ₹3,000. Before the new bill matured, Suresh became insolvent and his estate paid only 40 paise in a rupee. Ravi wants to know the discount charged, the amount of the renewed bill, and the loss he must write off. He has not yet recorded the dishonour or renewal in his books.
1. Compute the discount charged and the amount for which the new bill was drawn. Show the treatment of noting charges.
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Discount = ₹1,20,000 × 12/100 × 3/12 = ₹3,600. Ravi receives ₹1,16,400 from the bank.
On dishonour, the bank debits Ravi with the bill amount plus noting charges: ₹1,20,000 + ₹500 = ₹1,20,500. Noting charges are borne by the acceptor, Suresh, because the bill was dishonoured by him; Ravi can recover them from Suresh. The renewed bill is therefore drawn for ₹1,20,000 + ₹500 noting charges + ₹3,000 interest = ₹1,23,500. The interest is income to Ravi and an expense for Suresh.
2. Pass journal entries in Ravi's books for discounting, dishonour, renewal and insolvency.
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Discounting: Bank A/c Dr ₹1,16,400 Discount A/c Dr ₹3,600 To Bills Receivable A/c ₹1,20,000
Dishonour and payment to bank: Suresh A/c Dr ₹1,20,500 To Bank A/c ₹1,20,500
Interest on renewal: Suresh A/c Dr ₹3,000 To Interest A/c ₹3,000
New bill drawn: Bills Receivable A/c Dr ₹1,23,500 To Suresh A/c ₹1,23,500
Insolvency and final recovery: Bank A/c Dr ₹49,400 Bad Debts A/c Dr ₹74,100 To Bills Receivable A/c ₹1,23,500
3. Calculate the loss on insolvency and state who ultimately bears the noting charges.
Read the worked answer
Recovery = 40 paise per rupee on ₹1,23,500 = ₹1,23,500 × 0.40 = ₹49,400.
Loss = ₹1,23,500 − ₹49,400 = ₹74,100. This is written off as bad debts in Ravi's books.
Noting charges are ultimately borne by the acceptor, Suresh, because they arise from his dishonour. Ravi paid them to the bank only to protect his position, and included them in Suresh's debt. Since Suresh is insolvent and pays only 40 paise, the unpaid portion of the noting charges forms part of the ₹74,100 bad debt.