Question

Mr. Ali is a local exporter in Oman and exports organic products to various countries. During his sales last year he exported goods to Bahrain, UAE, Kuwait, and Jordan. Mr. Said is an importer from Jordan. Ali is flexible in his transactions with its customers and provides them with both the options i.e. cash and credit. On 12th September 2019, Ali exported goods to Said for OMR 78,000. Said agreed payment terms with him later to which Ali drew a four months bill. Said received the bill and returned without signing it. On 15th September Ali drew a new bill for the same amount on Said, which was accepted. Ali needed funds, he tried to arrange through various sources however nothing worked in his favor, and on 15th October he decided to get the bill discounted with Bank Dhofar @ 8% p.a. as he is one of its corporate customers. The bill is duly met on the due date. Assume that the bank prepares its financial statements at the end of the year as on 31st December.


You are required to:

a) Comment why Ali has to draw the second bill on Said and the importance of acceptance (150 words minimum/ 2 Marks) b) Calculate the amount received by Mr. Ali on discounting the bills ( 50 words minimum/1 Mark) c) Give journal entries in the books of bank assuming the bill is met at the maturity

Answer 1

Facts of the Case
-12-Sep-19	Exported to Said	OMR 78000
-Entered into 4 months bills ( Negotiable Instrument)
-Said received and retuend without signing (Non - Accepting the bill)
-15-Sep-19	New Bill Raised on Said ( Accepted by Said)
-15-Oct-19	Discounted at 8% from Bank Dhofar
-Bill Duly met on Due Date
-As per Bill, Due date falls on 15 September to 15 October 2019
15 October 2019 to 15 November 2019
15 November 2019 to 15 December 2019
15 December 2019 to 15 January 2020 ( 18 January 2020)

a): Here Promissory Note or Bill of Payments are said to be negotiable instrument once conditions for being negotiable is met. It means it is kind of contract which is valid and enforceable in law. accordingly As per act an agreement is a promise made by one person to another person to perform certain performance over payment of certain amount , it holds true when both party to the promises consensus over the same. thus accordingly, Similarly in case of Negotiable agreement, if the party raises the letter and writes that another party is oblige to make payment after particular period, then without acceptance of the same such written document not holds good as a negotiable instrument nad not tenable in law.

Here in the current scenario Mr. Ali raised document and writes that Mr. Said is obliged to make payment of OMR 75000 after 4 months, but non acceptance by Mr. Said dont hold the paper as negotiable instrument as derive it as simply a piece of paper and nothing else. therefore on 15 September acceptance of the letter by Mr. Said become negotiable instrument as in this Mr. Said is accepted that he is obliged to make payment of OM 75000 to theMr. Ali after 4 months. Failure to do so may attracts penaly and other compensatory payments to Mr. Ali.

b) Here, Mr. Ali went to bank for encash the Instrument to fulfil his working capital requirement, here as he is getting cash early on 15 October instead of 15 January 2019. So for getting funds early bank will reduce the same as charges from the Bill of Payment as hold in the name of Mr. Ali. Bill of Payment now stands in the name of Bank as they are transferable and negotiable in the name of transfaree( Bank).

Here Bill is discounted on 15 October 2019:

No. of Days left to mature the bill is:

15 days of October + 30 days of November month+ 31 Days of December month + 18th of January Month

16 days in October + 30 days in November + 31 days in december + 18 days in January = 95 days

So Bill Discounted = 75000 OMR X 95 / 365 X 8/100 =1561.65 OMR

So Final amount gathered by Mr. Ali is 75000 OMR - 1561.65 OMR = 73438.35 OMR

c) Assuming Bill is due at maturity

In the Books of Bank:

Period Covering from 31 December to 18 January 2020.

18 Days only. 75000 X 18/ 365 X 8 % = 295.89 OMR

On 31 December 2019

Interest and Discount A/c Dr.   295.89 OMR

To Rebate on Bill Discounted A/c 295.89 OMR

( Proportionate amount of unexpired bill adjusted)

On 31 Decemebr 2019

Customer Liability for Acceptance A/c Dr. 75000

To Acceptance on Behalf of Customers A/c 75000

On 18 January 2019

Cash A/c Dr. 75000

to Customer Liability for Acceptance A/c 75000

( Being Amount paid off by the Mr. Said)