Question 1

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

Accepted Answer

A notes payable due within one year is a short-term liability, and is therefore classified as a Current Liability on the balance sheet. It represents an amount that the company owes to another party and is expected to be repaid within the next year. It is not classified as a Current Asset since it represents a liability rather than an asset. It is also not classified as an expense or income on the income statement as it represents a financial obligation and not a revenue or expense transaction.

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.​

Accepted Answer

The discount period is the time duration during which the bank can make payment of a note at a discounted rate. It begins on the date the note is discounted and ends on the maturity date of the note. Therefore, the first statement is true.

Question 3

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

Accepted Answer

At maturity, the borrower pays back the face value of the note. The interest is deducted upfront when the note is discounted.

Question 4

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

Accepted Answer

The amount received by the borrower after the discount has been subtracted is called the proceeds. This is the actual amount of cash that the borrower receives from the lender. The discounted principal is the original principal amount of the loan minus the discount. Net principal is not a standard term used in discounting notes payable. Maturity value is the total amount of the loan including interest that is due at maturity.

Question 5

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

Accepted Answer

This statement is true. When a bank discounts a note payable, they deduct the interest in advance and provide the borrower with the remaining amount. This is because interest is charged upfront on the entire amount of the note, rather than over its entire term.

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 _____.

Accepted Answer

The proceeds received by Miami Company would be the face value of the note minus the discount.

Discount = face value * rate * time
Discount = $8,000 * 0.08 * (45/360)
Discount = $80

Proceeds = face value - discount
Proceeds = $8,000 - $80
Proceeds = $7,920

Therefore, the answer is C) $7,920.

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?

Accepted Answer

The original purchase is recorded by debiting the Purchase account for $1,000 and crediting the Accounts Payable, Glorial Company account for $1,000. This entry reflects that the merchandise was purchased on account and that the amount owed is $1,000. The later transaction of settling the account with a note payable would be recorded separately.

Question 8

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

Accepted Answer

April 15 is the reference date, and 90 days after that date is July 14. Therefore, the best choice is A).

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?

Accepted Answer

The correct journal entry is to debit Cash for the amount received ($3,920), debit Interest Expense for the interest cost of the loan ($80), and credit Notes Payable for the full amount of the note ($4,000). This reflects the receipt of cash, the expense of borrowing, and the obligation to repay the full amount.

Question 10

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

Accepted Answer

Interest is the charge or fee paid for the use of money over a period of time. The principal of a note refers to the original amount borrowed, while the maturity value of a note is the total amount due at the end of a loan term. The dishonored value of a note refers to a situation where the borrower fails to repay the loan as agreed.

Question 11

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

Accepted Answer

A notes receivable is classified as a long-term asset if the repayment period is longer than a year, not shorter. If the repayment period is shorter than a year, it is classified as a current asset.

Question 12

The duration of a promissory note is:

Accepted Answer

The duration of a promissory note is the period of time between its issue date and maturity date, which is when the borrower is expected to repay the loan in full. This time period can vary based on the terms of the note, but it is typically several months to a few years. Choice B is incorrect because there is no requirement that the note must end at the calendar year. Choice C is incorrect because this would refer to the interest payment frequency, not the overall duration of the note. Choice D is incorrect because promissory notes can have various durations depending on the agreement between the parties involved.

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

Accepted Answer

This formula is correct and used to calculate the interest paid on a 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?

Accepted Answer

The correct journal entry to record the issuance of a note in settlement of an account payable involves debiting (decreasing) Accounts Payable and crediting (increasing) Notes Payable for the amount of the note, which is $800 in this case.

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.

Accepted Answer

When a supplier accepts a note as payment, the company is given an extension of time to make the payment. The note usually has a specific maturity date, and the company is expected to pay the supplier by that date. This allows the company to better manage its cash flow and potentially avoid defaulting on 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?

Accepted Answer

First, we need to calculate the interest on the note:
Interest = Principal x Rate x Time
Time = 60/360 (since we are assuming a 360-day year)
Time = 1/6
Interest = $900 x 0.1 x 1/6
Interest = $15

The maturity value of the note is the sum of the principal and interest:
Maturity value = Principal + Interest
Maturity value = $900 + $15
Maturity value = $915

Therefore, the correct answer is A) $915.

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.)

Accepted Answer

The interest on the note can be calculated using the formula: Interest = Principal × Rate × Time. Here, Principal = $10,000, Rate = 10% (or 0.10), and Time = 79/360 years (since a 360-day year is assumed). Thus, Interest = $10,000 × 0.10 × (79/360) = $219.44, which rounds to $219.

Question 18

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

Accepted Answer

A note is considered discounted when it is sold or financed for less than its face value before its maturity date, not because of failure to pay or renew at maturity.

Question 19

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

Accepted Answer

Dishonored notes receivable are those that are not paid by the debtor and therefore, are not sold to a bank or finance company for financing. Instead, they become accounts receivable, and the company may continue to pursue collection efforts or take legal action to recover the unpaid amount.

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.

Accepted Answer

The correct answer is B because it accurately reflects the payment of the principal amount of the note ($1,200) and the interest accrued ($27) with a total payment of $1,227. The interest is calculated as follows: $1,200 * 9% * (90/360) = $27. This entry correctly debits both the principal (Notes Payable) and the interest expense, and credits cash for the total amount paid.

Quiz 16: Notes Receivablenotes Payable