Renewal of Bill of Exchange

Renewal of Bill of Exchange – Definition

Renewal of bill of exchange is an act of cancellation of old bill before its maturity in return of a new bill, including interest, for an extended period. It is done by drawer on request of drawee.

Explanation

Sometimes drawee may not in position to pay the amount of the bill on due date. He may request the drawer to cancel the old bill and to draw a fresh bill for an extended period.

Process of renewal

Students should remember the following process of renewal of the bill:


1). First of all old bill is canceled. The journal entry for the cancellation of the bill is same as entry was made in case of bill dishonored. Under each option used by the drawer i.e. when drawer keeps bill with himself, gets discounted, endorses or sends for collection.

2). Entry for partial payment of the bill including interest if paid in cash.

3). Entry for charging interest, if it is not paid in cash.

4). Entry for drawing a fresh bill for the outstanding amount.


Different ways of renewal of bill of exchange

A bill may be renewed in any of the following ways:

1). Drawee pays nothing and accepts new bill for original amount plus interest.

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2). Drawee pays partial amount and accepts new bill for balance plus interest.

3). Drawee pays interest in cash and accepts new bill for the original amount.

4). Drawee pays partial amount and interest in cash and accepts new bill for the balance amount.

Journal entries for renewal of bill of exchange

  1. Renewal of Bill, Drawee pay nothing and accepts new bill for the original amount plus interest.

Example 1:

P draws a two months bill on Q for $15,000 on 1st January 2019. Q returns the bill to P after accepting it. On 1st March, Q, being unable to pay the bill requests P to cancel the first bill and draw fresh bill for the amount of the first bill plus interest @ 10% p.a. P agrees to the proposal and does so. The new bill is for two months. On due date second bill is met.

Required: Pass journal entries in the books of both the parties.

Solution:

Renewal of bill of exchange - Journal entries

W-1:

W-1.1

Renewal of Bill

2. Renewal of Bill, Drawee pays the partial amount and accepts the new bill for balance plus interest.

Example 2

On 1st January 2019,  A sold goods to B for $10,000 on Credit. On the same date, A drew a three months bill of exchange on B, who accepted it and returned it to A. Before due date B requested A to receive $4,000 and draw a new bill of three months for the balance plus interest@10% p.a. A agreed to B. The new bill was met by B.

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Required: Pass journal entries in the books of A and B.

Solution:

Example 1.1

W-1:

w-1.2

Example 2.2

3. Renewal of Bill, drawee pays interest in Cash and accept bill for the original amount.

Example 3

K accepts a three months bill of R for the value received of $25,000. Before due date K asks R to renew the bill to which R agrees. Terms are that K will pay $500 in cash in cash for interest and will accept a new bill of two months for original amount of the first bill.

Required: Pass journal entries in the books of both the parties.

Solution:

Renewal of bill of exchange - Practical Problems

Journal entries for renewal of bill of exchange

4. Renewal of Bill, pays partial payment and interest in Cash and Accepts new bill for the balance amount.

Example 4

On 1st April 2019, John drew a three months bill on Yasir for $12,000, which was duly accepted and returned by David. John immediately got the bill discounted @ 12% p.a. At maturity, David was able to pay $2,300 only, out of which $300 for interest. David requested john to draw on him another bill for the balance amount. John did the same. The new bill was for two months and met on the due date.

Required: Pass Journal entries in the books of John and David.

Solution:

Example 3.3

New Bill Met

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