Question 1

Prepare journal entries for the following transactions for Sysco Imports Company.
a)Purchased $4,000 of merchandise (periodic)from Clarke Industries Company on account.
b)Gave Clarke Industries Company a 60-day,9% note settlement of the account payable.
c)Sysco defaulted on its note on the maturity date.
d)Sysco paid the previously defaulted note plus $25 additional interest.

Accepted Answer

The answer of Prepare journal entries for the following transactions...

Question 2

Ross,immediately after receiving a note from a customer,discounted it at the bank and received the proceeds.Ross's entry on his books would be to:

Accepted Answer

The answer of Ross,immediately after receiving a note from a...

Question 3

The discount period begins with the date of issue and ends with the date of the discount.

Accepted Answer

The discount period begins with the date of the discount and ends on the last day of the discount period. The date of issue is not relevant to the discount period.

Question 4

The amount the bank charges when it discounts a note is calculated as:

Accepted Answer

The formula for bank discount is maturity value × bank discount rate × (discount period /360 days). This means that the discount is calculated based on the maturity value of the note, the bank discount rate, and the discount period. Option A is incorrect because it uses note principal instead of maturity value. Option B is incorrect because it uses the original note period instead of the discount period. Option C is incorrect because it adds the original interest rate to the bank discount rate, which is not the correct formula for calculating bank discount.

Question 5

Prepare the journal entries for the following transactions for Dobson Industries Company.
a)Dobson sold $5,000 of merchandise to Bolt Imports Company on account.
b)Dobson accepted a 60-day,9% note from Bolt in settlement of its account.
c)Bolt defaulted on its note on the maturity date.
d)Collected the previously defaulted Bolt note plus $25 additional interest.

Accepted Answer

The answer of Prepare the journal entries for the following...

Question 6

Marble Company discounts a customer's 12%,$5,000,60-day note dated August 1,on August 16.The discount period is 45 days,and the bank discount rate is 15%.The maturity value of the note is $5,100.The bank discount is:

Accepted Answer

First, let's find the bank discount:
$5,000 x 15% x (45/360) = $37.50

Then, let's subtract the bank discount from the maturity value to find the amount paid to the customer:
$5,100 - $37.50 = $5,062.50

Finally, let's subtract the amount paid to the customer from the face value of the note to find the discount:
$5,000 - $5,062.50 = -$62.50

Since the discount is negative, it means the customer received more than the face value of the note. Therefore, the correct answer is A) $95.62, which is equal to the amount the customer received more than the face value (12% of $5,000).

Question 7

Prepare journal entries for the following transactions for Grant Company:
 $\text {May 1}$  $\quad $$\text {Purchased equipment from Krox, Inc. for $\$ 2,060$ giving a 2-month $6 \%$ note}$
$\text {July I}$ $\quad $  $\text {Paid amount due on rote}$

Accepted Answer

The answer of Prepare journal entries for the following transactions...

Question 8

A $6,500,12% note dated April 23 for 88 days was discounted on June 2 at 14%.The number of days in the discount period is:

Accepted Answer

The discount period is from June 2 to August 20, which is 48 days.

Question 9

When Major endorsed customer Minor's note to Story County Bank,Major agreed to pay the note at maturity if Minor failed to pay.Major's liability is a(n):

Accepted Answer

Major's liability is contingent because it depends on the possibility of Minor defaulting on the loan. It is not an absolute liability because Major is not initially responsible for the repayment of the loan, and it is not a contra-liability because it does not reduce an existing liability for the bank.

Question 10

The discount period on a discounted note is:

Accepted Answer

The discount period is the time between the discount date (when the note is sold to a buyer at a discounted rate) and the maturity date (when the note is due to be paid in full). This is the period during which the buyer earns interest on the note, making it the discount period. Option A is incorrect as it assumes the discount period is the same as the original note period, and option B is incorrect as it describes the time between the original date and the discount date, which is not necessarily the discount period. Option D is also incorrect as it provides a general statement that may not apply to all discounted notes.

Question 11

On February 15,Weber Services discounts a customer's 9%,90-day,$10,000 note dated January 10.The discount rate charged by the bank is 12%.The discount period is:

Accepted Answer

The discount period is the time from the date of discounting (February 15) to the maturity date of the note. The note is dated January 10 and is for 90 days, so it matures on April 10. From February 15 to April 10 is 54 days.

Question 12

Mountain Site discounts a customer's 12%,$6,000,90-day note dated July 1,on August The discount period is 45 days,and the bank discount rate is 18%.The maturity value of the note is $6,180.The bank discount is $139.The proceeds of the note are:

Accepted Answer

The proceeds of the note are the face amount minus the bank discount. The bank discount is calculated as the face amount multiplied by the discount rate multiplied by the fraction of the year that the note is outstanding. In this case, the face amount is $6,000, the discount rate is 18%, and the note is outstanding for 45 days, which is 45/360 of a year. Therefore, the bank discount is $6,000 * 0.18 * 45/360 = $139. The proceeds of the note are therefore $6,000 - $139 = $5,861.

Question 13

Steadman's Computer endorses a customer's note dated June 17 to the bank on August The interest rate on the note is 10%,and the bank discount rate is 12%.The note matures on September 6.The discount period is:

Accepted Answer

To calculate the discount period, we need to calculate the number of days between the date the bank received the note (August) and the maturity date (September 6).
Number of days between August and September 6 = 20 days

Since the bank discount rate is 12% and the interest rate on the note is 10%, the bank will deduct an amount equal to 12% of the face value of the note for a period of 20 days to calculate the money it will lend to the customer.

Using the bank discount formula:
Discount = Face Value x Discount Rate x Time
where Time = Discount Period / 360 (assuming a 360-day year)

Solving for Discount Period:
Discount / (Face Value x Discount Rate) = Time
20 = Discount / (Face Value x 12%)
Discount = Face Value x 12% x 20
Discount = Face Value x 0.24

Now we know that the bank will deduct an amount equal to 0.24 times the face value of the note. To calculate the discount period, we need to find out how many days of interest this represents at the interest rate of 10%.

Using the simple interest formula:
Interest = Principal x Rate x Time

Solving for Time:
Discount = Interest
Face Value x 0.24 = Face Value x 10% x Time
Time = Discount Period / 360 (assuming a 360-day year)
Time = 0.24 / 0.1 x 360
Time = 21.6

Rounding down to the nearest whole number, the discount period is 21 days. Therefore, the answer is A) 21 days.

Question 14

The entry to record the cash received on a note discounted at less than face value is to:

Accepted Answer

When a note is discounted at less than face value, the interest expense is recorded upfront and deducted from the face value of the note. Therefore, we need to debit Cash for the amount received, debit Interest Expense for the upfront interest, and credit Notes Receivable for the face value of the note.

Question 15

When a company goes to a bank and exchanges a note for cash,the process is called discounting a note.

Accepted Answer

This is true, as discounting a note refers to a process where a company receives cash from a bank in exchange for a discount on the face value of the note.

Question 16

The proceeds from discounting a note receivable are the:

Accepted Answer

When a note receivable is discounted, the holder of the note receives the maturity value minus the discount, or the amount of interest that is being forfeited by receiving the cash early. Therefore, the proceeds from discounting a note receivable are the maturity value minus the discount (option B).

Question 17

A $6,500,12% note dated April 23 for 88 days was discounted on June 2 at 14%.The amount of the discount (using a 360-day year)is:

Accepted Answer

Step 1: Find the maturity value of the note.

Maturity Value = Principal + Interest

Interest = Principal x Rate x Time 
Time = 88/360 year (using a 360-day year)

Interest = $6,500 x 12% x 88/360 = $212.22

Maturity Value = Principal + Interest = $6,500 + $212.22 = $6,712.22

Step 2: Find the discount.

Discount = Maturity Value x Discount Rate x Time 
Time = 40/360 year (using a 360-day year)

Discount = $6,712.22 x 14% x 40/360 = $124.89

Therefore, the amount of the discount is $124.89. The best choice is C.

Question 18

When a business endorses a note and transfers it to a financial institution,the process is called:

Accepted Answer

When a business endorses a note and transfers it to a financial institution at a discount, it is called discounting a note receivable.

Question 19

Bill's Bikes discounts a 90-day,8%,$4,000 note at a bank at 12%.The discount period is 50 days.It records the proceeds as:

Accepted Answer

The answer of Bill's Bikes discounts a 90-day,8%,$4,000 note at...

Question 20

When a note receivable is discounted,the business that endorses the note becomes potentially liable to the bank.This type of liability is called a:

Accepted Answer

A discounted note receivable means the bank has paid cash to the business before the due date of the note, but at a reduced (discounted) amount. The business that endorses (guarantees) the note becomes potentially liable to the bank if the person or company (maker) who issued the note fails to pay. This type of liability is called a contingent liability, as it depends on the outcome of the maker's payment.

Quiz 14: Notes Receivable and Notes Payable