Deck 16: Notes Receivablenotes Payable

Question 1

Which of the following is true about a notes payable due within one year?

A) It is classified as Current Asset on the balance sheet.
B) It is classified as Current Liabilities on the balance sheet.
C) It is classified as an Expense on the income statement.
D) It is classified as an Income on the income statement.

Answer 1

B

Question 2

The discount period of a note consists of the interval between the date the note is given to the bank and the maturity date of the note.​

Answer 2

True

Question 3

Which of the following should be paid back by a borrower at the maturity of a note discounted by a bank?

A) Only the face value of the note
B) Only the interest
C) Both the face value and interest
D) No payment required as the note is discounted by bank

Answer 3

A

Question 4

In discounting a note payable, the principal of the loan left after the discount has been subtracted is called the _____.

A) proceeds
B) discounted principal
C) net principal
D) maturity value

Question 5

A bank discounts a note payable by deducting interest in advance.

Question 6

As a result of a loan from National Bank, Miama Company signed a 45-days note for $8,000 that the bank discounted at 8 percent. Assuming a 360-day year, the proceeds received by Miama Company equals _____.

A) $8,000
B) $8,080
C) $7,920
D) $7,360

Question 7

Jenny Cosmetics bought $1,000 worth of merchandise from Glorial Company on account on June 16, with terms n/30. Glorial Company agreed to accept a 30-day, 8 percent, $1,000 note in settlement of the account. Which of the following journal entries records the original purchase in general journal form on Jenny's books?

A) Debit Purchase by $1,000; credit Notes Payable by $1,000
B) Debit Purchase by $1,006.67; credit Accounts Payable, Glorial Company by $1,006.67
C) Debit Purchase by $1,000; credit Accounts Payable, Glorial Company by $1,000
D) Debit Purchase by $1,006.67; credit Notes Payable by $1,006.67

Question 8

The due date of a promissory note is specified as 90 days after April 15. The due date is _____.​

A) ​July 14
B) ​July 13
C) ​July 01
D) ​July 31

Question 9

Rock Company borrows $4,000 for 120 days from National Bank on March 18. The bank charged a discount rate of 6 percent. Assume a 360-day year. Which of the following journal entries records the transaction on March 18 for Rock Company?

A) Debit Cash by $3,920; credit Notes Payable by $3,920
B) Debit Interest Expense by $80; credit Notes Payable by $80. Principal is recorded at maturity.
C) Debit Cash by $4,000; credit Notes Payable by $4,000. Interest expense is recorded at maturity.
D) Debit Cash by $3,920, debit Interest Expense by $80; credit Notes Payable by $4,000

Question 10

The _____ is a charge made for the use of money.

A) principal of a note
B) maturity value of a note
C) interest on a note
D) dishonored value of a note

Question 11

A notes receivable is classified as a long-term asset if the repayment period is shorter than a year.

Question 12

The duration of a promissory note is:

A) the period of time between its issue date and its maturity date.
B) the period of time between its issue date and the end of the calendar year.
C) the period of time between two consecutive interest payment dates of the note.
D) always fixed at one year.

Question 13

The formula that follows is used to calculate the interest that a maker of a note pays.
Interest = Principal of Note × Rate of Interest × Time of Note

Question 14

A company bought merchandise worth $800 on account on September 16, with terms n/30. The supplier agreed to accept a 30-day, 6 percent, $800 note in settlement of the account. Which of the following journal entries records the issuance of the note in the general journal of the purchasing company?

A) Debit Accounts Receivable by $820; credit Notes Payable by $820
B) Debit Supplier by $820; credit Notes Receivable by $820
C) Debit Accounts Payable by $800; credit Notes Receivable by $800
D) Debit Accounts Payable by $800; credit Notes Payable by $800

Question 15

If a supplier accepts a note for all or part of the amount due, the company gets an extension of time for the payment.

Question 16

A company accepts a 60-day, 10 percent, $900 note in settlement of an account. Assume a 360-day year. Which of the following is the maturity value of the note?

A) $915
B) $900
C) $990
D) $15

Question 17

Kate gives a 79-day, 10 percent note, to Windsor Company in the amount of $10,000. Which of the following is the interest to be paid on the note at maturity? Assume a 360-day year. (Round your answer to the nearest dollar.)

A) $1,033
B) $219
C) $4,557
D) $797
​

Question 18

A note is considered discounted when its maker fails to pay the principal amount or to renew the note at maturity.

Question 19

The notes receivable sold to a bank or finance company to raise finance are called dishonored notes receivable.

Question 20

A company accepts a 90-day, 9 percent, $1,200 note from one of its customers on June 15 in settlement of its account. Which of the following journal entries records the payment at maturity in the customer's general journal form? Assume a 360-day year.

A) Debit Accounts Payable by $1,227; credit Cash by $1,227
B) Debit Notes Payable by $1,200, debit Interest Expense by $27; credit Cash by $1,227
C) Debit Notes Payable by $1,227; credit Cash by $1,227
D) Debit Accounts Payable by $1,227, credit Cash by $1,200; credit Interest Expense by $27

Question 21

Vast Company signed a 180-day note, dated March 1, for $4,500 that Rationale Bank discounted at 10 percent. Which of the following journal entries records the payment of the note to the bank at maturity for Vast Company?

A) Debit Notes Payable by $4,275; credit Cash by $4,275
B) Debit Notes Payable by $4,500; credit Cash by $4,500
C) Debit Interest Expense by $225; credit Cash by $225
D) Debit Notes Payable by $4,275, Interest Expense by $225; credit Cash by $4,500

Question 22

Health Acer Company granted an extension on an open account by accepting a 60-day, 6 percent note for $5,000, dated July 20. To raise cash, it sold the note to a bank on August 20. The bank charged a discount rate of 7 percent. Assume a 360-day year. Calculate the amount of interest income/expense in the deal. Round off the calculations to two decimal places.

Question 23

In discounting notes receivable, a financial institution generally discounts at a higher interest rate than stated in the note as it assumes _____ risk of maker's possible default.

A) increased
B) decreased
C) equal
D) no

Question 24

On May 15, Winterz Company received a 90-day, 10 percent note from its customer for $5,000. Which of the following journal entries record the receipt of payment on the due date from the customer? Assume a 360-day year.

A) Debit Accounts Receivable by $5,125; credit Notes Receivable by $5,000, credit Interest Income by $125
B) Debit Cash by $5,125; credit Notes Receivable by $5,000, credit Interest Income by $125
C) Debit Cash by $5,125; credit Notes Receivable by $5,125. No separate entry is required for interest.
D) Debit Cash by $4,875; credit Notes Receivable by $4,875. Interest is recorded before maturity.

Question 25

Springz Company received a 120-day, 9 percent note for $1,200, dated March 18, from Jenny, a charge customer, to satisfy his open account receivable. Which of the following journal entries records the receipt of the note in the general journal of Springz Company?

A) Debit Notes Receivable by $1,236; credit Accounts Receivable, Jenny by $1,200, Interest Income by $36
B) Debit Cash by $1,200; credit Accounts Receivable, Jenny by $1,200
C) Debit Notes Receivable by $1,200; credit Accounts Receivable, Jenny by $1,200
D) Debit Notes Receivable by $1,164; credit Accounts Receivable, Jenny by $1,164

Question 26

Summerz Company granted an extension on an open account by accepting a 30-day note for $7,000 dated June 20, from SunnyView Company. To raise cash, Summerz sold the note to a bank on June 29. The days held by endorser and the discount period of the note is:​

A) ​9 days and 21 days, respectively.
B) ​21 days and 9 days, respectively.
C) ​8 days and 22 days, respectively.
D) ​10 days and 20 days, respectively.

Question 27

Which of the following is the first step of the procedure to handle discounted notes receivable?

A) ​Diagram the situation.
B) ​Determine the discount period.
C) ​Record the formula.
D) Complete the formula.

Question 28

Which of the following formulas calculates the amount of proceeds from a discounted notes receivable?

A) Proceeds = Principal
B) Proceeds = Principal - Interest to maturity date
C) Proceeds = Principal + Interest to maturity date - Bank's discount
D) Proceeds = Principal + Bank's discount

Question 29

Ross Company holds a 90-day, 6 percent note for $400 from one of its customers. The customer fails to pay by the due date. Assume a 360-day year. Which of the following is the correct treatment to record the transaction?

A) Debit Accounts Receivable by $400; credit Notes Receivable by $400
B) Debit Accounts Receivable by $406; credit Notes Receivable by $400, credit Interest Income by $6
C) Debit Revenue by $400; credit Notes Receivable by $400
D) No entry unless payment is received from the customer

Question 30

Omega Company granted an extension on an open account by accepting a 90-day, 6 percent note for $3,000, dated July 25. To raise cash, it sold the note to a bank on August 25. The bank charged a discount rate of 7 percent. Assume a 360-day year. Which of the following is the entry to record the transaction on August 25 in Omega Company's general journal? Round off the calculations to two decimal places.

A) No entry till maturity date
B) Debit Cash by $2,975.07, Interest Expense by $24.96; credit Notes Receivable by $3,000
C) Debit Cash by $3,004.15, Discount by $45; credit Notes Receivable by $3,000, Interest Income by $40.85
D) Debit Cash by $3010.07; credit Interest Income by $10.07, Notes Receivable by $3,000