(a) D. Johnson, at the time he received the note from Canning, made the following entry:

Notes Receivable 100.00
P. Canning 100.00

and on December 15, in order to show that the note is dishonored, he may make either of the following two entries:

(1) P. Canning 100.00
Notes Receivable 100.00
or
(2) Notes Receivable Dishonored 100.00
Notes Receivable 100.00

Entry (1) takes the charge out of the note account and sets it up again as a claim on Canning’s open account. Entry (2) transfers the charge to a Notes Receivable Dishonored account. Entry (2) is theoretically a better entry than entry (1), because from the latter it might be inferred that the nature of the claim has changed from a note claim to an open account claim. Such change has not taken place, however; Johnson’s claim against Canning is still on the note. Therefore, entry (1) is not true to the facts.

On the other hand, entry (1) has an important advantage over entry (2), because by posting entry (1) Canning’s personal account in the ledger is made to show the fact that one of his promissory notes was dishonored. This is a matter of very great importance, especially if Canning should again apply for an extension of credit.

If the second method is adopted, it is clear that the posting of the entry will not show the dishonor of the note on Canning’s account. It is essential, therefore, that the bookkeeper should make a special memo of the fact in that account. If the bookkeeper could be depended upon to make such memorandum entry, the desired purpose of making Canning’s account show a complete record of all dealings with him would be accomplished. Any treatment consistent with accounting principles and securing a complete history in one place of all dealings with the same individual satisfies all requirements.

(b) A. Andrews, who is the last indorsee of the note, should make the following entry at the time the note is dishonored:

Notes Receivable Dishonored 250.00
Notes Receivable 250.00