Renewal of Bill of Exchange

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Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on February 27, 2023

Renewal of Bill of Exchange: Definition

A renewal of bill of exchange is an act in which an old bill is canceled before maturity in return for a new bill, including interest, for an extended period. It is performed by a drawer at the request of a drawee.

Renewal of Bill of Exchange: Explanation

Sometimes, a drawee may not be in a position to pay the amount of a bill on the due date. In this case, they may ask the drawer to cancel the old bill and draw a fresh one for an extended period.

Process of Renewal

The steps involved in the renewal of a bill of exchange are the following:

1. The old bill is canceled. The journal entry for cancellation of the bill is the same as the entry made if a bill is dishonored.

Under each option used by the drawer (i.e., when the drawer keeps the bill with themselves, gets the bill discounted, or endorses or sends it for collection).

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

3. Entry made for charging interest if not paid in cash.

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

Different Ways of Renewing a Bill of Exchange

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

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

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

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

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

Journal Entries for Renewal of Bill of Exchange

Example 1: Drawee pays nothing and accepts new bill for original amount plus interest

P draws a two-month bill on Q for $15,000 on 1 January 2019. Q returns the bill to P after accepting it.

On 1 March, Q is unable to pay the bill. Therefore, they ask P to cancel the first bill and draw a fresh bill for the amount of the first bill plus interest @ 10% p.a.

P agrees to the proposal and does so Q. The new bill is for two months. On the due date, the second bill is met.

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

Solution:

Journal Entry for P's Books

W-1:

Example 1 Calculation for Amount of Interest
Journal Entry for Q's Books


Example 2: Drawee pays partial amount and accepts new bill for balance plus interest

On 1 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 the due date, B paid A $4,000 and asked them to draw a new three-month bill for the balance plus interest @10% p.a. A agreed and B met the new bill.

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

Solution:

Journal Entry for A's Books

W-1:

Example 2 Calculation for Amount of Interest
Journal Entry for B's Books


Example 3: Drawee pays interest in cash and accepts bill for original amount

K accepted a three-month bill from R for $25,000. Before the due date, K asked R to renew the bill and R agreed.

The terms were that K would pay $500 in cash in cash as interest and would accept a new two-month bill for the original amount of the first bill.

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

Solution:

Journal Entry for R's Books
Journal Entry for K's Books


Example 4: Drawee pays partial payment and interest in cash and accepts new bill for balance amount

On 1 April 2019, John drew a three-month bill on Yasir for $12,000, which was duly accepted and agreed to be 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 was for interest.

David asked John to draw another bill for the balance amount. John did so, with a new two-month bill created that was eventually met on the due date.

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

Solution:

Journal Entry for John's Books
Journal Entry for David's Books

Renewal of Bill of Exchange FAQs

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About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.