Question 1

On October 1,2018,Saddleback,Inc.negotiates with its bank to borrow $18,000 cash on a one-year note.The bank charges 5% interest.Interest payments are to be made in two installments,on March 31 and September 30.The principal is to be repaid on September 30,2019,the maturity date.What adjusting entry needs to be recorded of December 31,2018?
A)Debit Interest Expense and credit Interest Payable for $450.
B)Debit Interest Expense and credit Interest Payable for $225.
C)Debit Interest Expense and credit Interest Payable for $900.
D)Debit Interest Payable and credit Interest Expense for $900.

Accepted Answer

The amount of interest expense that has accrued as of December 31,2018,is computed as follows: $18,000 × 0.05 × 3 / 12 = $225.Since interest has accrued but has not yet been paid,Interest Expense must be debited and Interest Payable must be credited for $225.

Question 2

In October,the CEO of Saguaro,Inc.signs a note for $90,000 in order to buy new equipment.The note is due in five years,at 8% annual interest.Semiannual interest payments are due each April and October.Assuming no other long-term debt,what is the initial balance in the related long-term debt account?
A)$82,800
B)$90,000
C)$93,600
D)$97,200

Accepted Answer

The note payable is recorded at the amount borrowed of $90,000.

Question 3

Travis County Bank agrees to lend Brickyard Corporation $200,000 on January 1.Brickyard signs a $200,000,4%,9-month note.Interest is due at maturity on September 30.The company's fiscal year ends June 30 and adjusting entries are recorded at that time only. On January 1,which of the following journal entries will be made by Brickyard to record the issuance of the note?
A)Debit Interest Expense for $6,000,debit Cash $194,000,and credit Notes Payable for $200,000.
B)Debit Cash and credit Notes Payable for $200,000.
C)Debit Cash for $200,000,debit Interest Expense for $6,000,and credit Notes Payable for $206,000.
D)Debit Cash for $200,000,debit Interest Expense for $6,000,credit Notes Payable for $200,000,and credit Interest Payable for $6,000.

Accepted Answer

The journal entry to record the issuance of the promissory note includes a debit to Cash and a credit to Notes Payable for $200,000.

Question 4

What kind of account is Deferred Revenue?
A)Asset
B)Liability
C)Revenue
D)Expense

Accepted Answer

Deferred revenues represent a liability because goods or services have been paid for,but not yet provided to the customer.

Question 5

On October 1,2018,Highview Company borrows $360,000 on a three-year note that requires the company to pay 6% interest on March 31 and September 30.On December 31,2018,the adjusting entry to accrue interest on the note should debit:
A)Interest Expense and credit Interest Payable for $5,400.
B)Interest Payable and credit Interest Expense for $5,400.
C)Interest Expense and credit Cash for $10,800.
D)Interest Expense and credit Interest Payable for $10,800.

Accepted Answer

The adjusting entry includes a debit to Interest Expense and a credit to Interest Payable for $5,400 [or Principal of $360,000 × Interest rate of 6% × Time of 3 / 12 (October 1 through December 31)].

Question 6

When interest is accrued on a note payable,but not paid,the
A)Interest Expense account is increased;the Interest Payable account is increased.
B)Interest Expense account is decreased;the Interest Payable account is increased.
C)Notes Payable account is increased;the Interest Payable account is increased.
D)Interest Expense account is increased;the Interest Payable account is decreased.

Accepted Answer

Interest is accrued by increasing a liability account (Interest Payable)and recording the cost of interest as an expense (Interest Expense).

Question 7

Interest on an obligation is recorded:
A)as time passes.
B)when goods are purchased on account.
C)at maturity.
D)when a bank loan is obtained.

Accepted Answer

Interest arises only when time passes,so no interest is recorded on the day the company purchases an item on account or the day the company receives a loan.

Question 8

A 6-month note is issued on October 1.If no previous accruals have been made,how many months of interest should be accrued at December 31?
A)Six
B)Three
C)Four
D)Two

Accepted Answer

Interest for three months (October,November and December)should be accrued at December 31.

Question 9

Teton Tax Service collects $440 for preparation of a tax return.The tax return will not be complete until the next accounting period.How does Teton record the $440 collected in advance?
A)A debit to Cash of $440 and a credit to Deferred Revenue of $440.
B)A debit to Deferred Revenue of $440 and a credit to Cash of $440.
C)A debit to Cash of $440 and a credit to Revenue of $440.
D)A debit to Revenue of $440 and a credit to Cash of $440.

Accepted Answer

When the $440 is collected,the company will record a debit to Cash (to increase that asset account)and a credit to Deferred Revenue (to increase that liability account).

Question 10

A company pays $9,000 in interest on notes consisting of $6,000 of interest that was accrued during the last accounting period and $3,000 of interest that accumulated during the current accounting period but has not yet been accrued on the books.The journal entry for the interest payment should include a:
A)debit to Interest Expense for $9,000 and a credit to Cash for $9,000.
B)debit to Cash for $9,000 and a credit to Interest Payable for $9,000.
C)debit to Interest Expense for $3,000,a debit to Interest Payable for $6,000,and a credit to Cash for $9,000.
D)debit to Interest Payable for $6,000,a debit to Accrued Interest for $3,000,and a credit to Cash for $9,000.

Accepted Answer

The journal entry includes a debit to Interest Expense for $3,000 (the amount accumulated during the current accounting period),a debit to Interest Payable for $6,000 (the amount that accrued during the last accounting period),and a credit to Cash for $9,000 (the total amount paid).

Question 11

Travis County Bank agrees to lend Brickyard Corporation $200,000 on January 1.Brickyard signs a $200,000,4%,9-month note.Interest is due at maturity on September 30.The company's fiscal year ends June 30 and adjusting entries are recorded at that time only. What journal entry will Brickyard make when paying the interest at maturity?
A)Debit Notes Payable and credit Cash for $206,000.
B)Debit Interest Expense for $4,000,and credit Cash for $4,000.
C)Debit Interest Expense for $6,000 and Cash for $206,000.
D)Debit Interest Payable for $4,000,debit Interest Expense for $2,000,and credit Cash for $6,000.

Accepted Answer

Recall that the company records adjusting entries at year-end on June 30.The journal entry to record the payment of the interest at maturity includes a debit to Interest Payable for $4,000 [or Principal of $200,000 × Interest rate of 0.04 × Time of 6 / 12 (January through June)],a debit to Interest Expense for $2,000 [or Principal of $200,000 × Interest rate of 0.04 × Time of 3 / 12 (July through September)],and a credit to Cash for $6,000 [or Principal of $200,000 × Interest rate of 0.04 × Time of 9 / 12 (January through September)].

Question 12

On October 1,Pinnacle Co.signs a note for $360,000 to provide the funds needed to build a new facility.The note is due in 10 years,includes an annual interest rate at 7%,and requires semiannual interest payments each April and October.The journal entry to record the issuance of the promissory note should debit:
A)Notes Payable for $360,000,debit Interest Expense for $25,200,credit Cash for $360,000,and credit Interest Payable for $25,200.
B)Accrued Interest and credit Cash for $25,200.
C)Cash and credit Notes Payable for $360,000.
D)Cash for $360,000,debit Interest Expense for $25,200,credit Notes Payable for $360,000,and credit Interest Payable $25,200.

Accepted Answer

The journal entry to record the issuance of the promissory note includes a debit to Cash and a credit to Notes Payable for $360,000.

Question 13

A company purchased equipment by issuing a $200,000,one-year,8% note payable.The transaction would be recorded in the accounting records with a credit to Notes Payable for:
A)$200,000.
B)$216,000.
C)$184,000.
D)$208,000.

Accepted Answer

Initially,the company records each liability at the amount of cash a creditor would accept to settle the liability immediately after a transaction or event creates the liability.The journal entry to establish this note would include a credit to Notes Payable for $200,000.

Question 14

The total amount of interest that will be paid on a four-month,$6,500,9% note payable equals:
A)$585.
B)$292.
C)$146.
D)$195.

Accepted Answer

Interest = Principal × Interest rate × Time
= $6,500 × 0.09 × 4 / 12 = $195

Question 15

A company pays $18,000 in interest on notes,consisting of $12,000 interest that was accrued during the last accounting period and $6,000 of interest that accumulated during the current accounting period but has not yet been accrued on the books.The journal entry for the interest payment should:
A)debit Interest Expense for $18,000 and credit Cash for $18,000.
B)debit Cash for $18,000 and credit Interest Payable for $18,000.
C)debit Interest Expense for $6,000,debit Interest Payable $12,000 and credit Cash for $18,000.
D)debit Interest Payable for $12,000,debit Accrued Interest $6,000 and credit Cash for $18,000.

Accepted Answer

The journal entry includes a debit to Interest Expense for $6,000 (the amount accumulated during the current accounting period),a debit to Interest Payable for $12,000 (the amount that accrued during the last accounting period),and a credit to Cash for $18,000 (the total amount paid).

Question 16

On October 1,2018,Teton Industries negotiates with its bank to borrow $20,000 cash on a one-year note.The bank charges 5% interest.Interest payments are to be made in two installments,on March 31 and September 30.The principal is to be repaid on September 30,2019,the maturity date.What journal entry needs to be recorded as of March 31,2019?
A)Debit Interest Payable $250,debit Interest Expense $250,and credit Cash $500.
B)Debit Interest Expense $500 and credit Cash $500.
C)Debit Interest Expense $500 and credit Interest Payable for $500.
D)Debit Interest Expense $250 and credit Cash for $250.

Accepted Answer

Debit Interest Payable for the amount that was accrued on December 1,2018 of $250 (or $20,000 × 0.05 × 3 / 12),debit Interest Expense for interest incurred in January through March of $250 (or $10,000 × 0.05 × 3 / 12),and credit Cash for the full interest payment due of $500 (or $20,000 × 0.05 × 6 / 12).

Question 17

Travis County Bank agrees to lend Brickyard Corporation $200,000 on January 1.Brickyard signs a $200,000,4%,9-month note.Interest is due at maturity on September 30.The company's fiscal year ends June 30 and adjusting entries are recorded at that time only. What adjusting entry should Brickyard make on June 30 before preparing its annual financial statements?
A)Debit Interest Expense and credit Interest Payable for $4,000.
B)Debit Cash and credit Interest Payable for $4,000.
C)Debit Cash and credit Interest Expense for $4,000.
D)Debit Interest Payable and credit Interest Expense for $4,000.

Accepted Answer

The adjusting entry should include a debit to Interest Expense and a credit to Interest Payable for $4,000 [or Principal of $200,000 × Interest rate of 0.04 × Time of 6 / 12 (January through June)].

Question 18

A one-year,$15,000,6% note is signed on April 1.If the note is repaid on September 1 of the same year,how much interest expense is incurred?
A)$900
B)$450
C)$375
D)$300

Accepted Answer

Interest = Principal × Interest rate × Time
= $15,000 × 0.06 × 5 / 12 (April through September)= $375

Question 19

Sales taxes are recorded by the retailer as:
A)Sales Tax Expense.
B)Sales Tax Payable.
C)Sales Revenue.
D)Sales Returns and Allowances.

Accepted Answer

Sales tax collected by a company is reported as a current liability until it is remitted (paid)to the taxing authorities.

Question 20

On October 1,2018,Allen Emig borrowed $306,000 from the West Coast Bank on a 6-month,6% note.Assuming no interest has been recorded yet,what is the amount of accrued interest as of December 31,2018?
A)$9,180
B)$4,590
C)$18,360
D)$13,770

Accepted Answer

Interest expense is calculated for October through December as follows:
Interest = Principal (P)× Interest Rate (R)× Time (T)
= $306,000 × 0.06 × 3 / 12 = $4,590

Quiz 10: Liabilities

What kind of account is Deferred Revenue?

On October 1,2018,Highview Company borrows $360,000 on a three-year note that requires the company to pay 6% interest on March 31 and September 30.On December 31,2018,the adjusting entry to accrue interest on the note should debit:

When interest is accrued on a note payable,but not paid,the

Interest on an obligation is recorded:

A 6-month note is issued on October 1.If no previous accruals have been made,how many months of interest should be accrued at December 31?

Teton Tax Service collects $440 for preparation of a tax return.The tax return will not be complete until the next accounting period.How does Teton record the $440 collected in advance?

A company purchased equipment by issuing a $200,000,one-year,8% note payable.The transaction would be recorded in the accounting records with a credit to Notes Payable for:

The total amount of interest that will be paid on a four-month,$6,500,9% note payable equals:

A company pays $18,000 in interest on notes,consisting of $12,000 interest that was accrued during the last accounting period and $6,000 of interest that accumulated during the current accounting period but has not yet been accrued on the books.The journal entry for the interest payment should:

A one-year,$15,000,6% note is signed on April 1.If the note is repaid on September 1 of the same year,how much interest expense is incurred?

Sales taxes are recorded by the retailer as:

On October 1,2018,Allen Emig borrowed $306,000 from the West Coast Bank on a 6-month,6% note.Assuming no interest has been recorded yet,what is the amount of accrued interest as of December 31,2018?