Question 1

Prepare the journal entries for the following transactions for Dobson Industries Company.
a)Dobson sold $8,000 of merchandise to Bolt Imports Company on account.The company uses the periodic method.
b)Dobson accepted a 90-day,7% 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

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Question 2

Prepare journal entries for the following transactions for Grant Company:
May 1 Purchased equipment from Knox,Inc.for $5,000 giving a 3 month 8% note
Aug.1 Paid amount due on note

Accepted Answer

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Question 3

The proceeds from discounting a note receivable are the:
A)principal + bank discount.
B)maturity value - bank discount.
C)principal - bank discount.
D)maturity value minus principal.

Accepted Answer

When a note receivable is discounted, the bank charges a discount fee, which is subtracted from the maturity value. The remaining amount is the cash received by the company. Therefore, the proceeds are the maturity value minus bank discount, which is option B.

Question 4

Prepare journal entries for the following transactions for Sysco Imports Company.
a)Purchased $6,000 of merchandise (periodic)from Clarke Industries Company on account.
b)Gave Clarke Industries Company a 150-day,6% note in 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

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Question 5

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:
A)dependent liability.
B)contingent liability.
C)potential liability.
D)conditional liability.

Accepted Answer

When a note receivable is discounted, the endorser becomes potentially liable to the bank in case the maker of the note defaults on their payments. This liability is contingent because it depends on the occurrence of a specific event, i.e., the default of the maker.

Question 6

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

Accepted Answer

The discount period is the time between the date of discount (when the buyer pays for the bill) and the maturity date (when the seller receives the full amount). During this period, the seller may choose to discount the bill (sell it for less than face value) to a financial institution in exchange for immediate cash.

Question 7

A $5,500,10% note dated May 20 for 78 days was discounted on June 23 at 12%.The amount of the discount (using a 360-day year)is:
A)$119.16.
B)$191.16
C)$124.89.
D)$82.41.

Accepted Answer

The answer of A $5,500,10% note dated May 20 for...

Question 8

The amount the bank charges when it discounts a note is calculated as:
A)bank discount = note principal × bank discount rate × (discount period /360 days).
B)bank discount = maturity value × bank discount rate × (original note period /360 days).
C)bank discount = maturity value × bank discount rate + original interest rate (discount period /360 days).
D)bank discount = maturity value × bank discount rate × (discount period /360 days).

Accepted Answer

The formula for bank discount is maturity value × bank discount rate × (discount period /360 days). This is because the bank charges a percentage of the maturity value as its fee for discounting the note. The discount period is the difference between the maturity date and the date of the discount. The bank discount is calculated based on a 360-day year. Therefore, D is the correct answer.

Question 9

Bill's Bikes discounts a customer's 90-day,8%,$4,000 note at a bank at 12%.The discount period is 50 days.It records the proceeds as:
A)debit Cash $4,012;credit Notes Receivable $4,000;credit Interest Income $12.
B)debit Cash $4,160;credit Notes Receivable $4,080;credit Interest Income $80.
C)debit Cash $4,068,credit Notes Receivable $4,000;credit Interest Income $68.
D)debit Cash $4,012;credit Notes Receivable $4,000,credit Interest Expense $12.

Accepted Answer

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

Question 10

On March 5,Weber Services discounts a customer's 9%,60-day,$10,000 note dated January 20.The discount rate charged by the bank is 12%.The discount period is:
A)24 days.
B)16 days.
C)60 days.
D)0 days.

Accepted Answer

To find the discount period, we need to calculate how many days have elapsed between the date the note was discounted (March 5) and the maturity date (60 days after January 20).

60 days - 45 days (from Jan 20 to March 5) = 15 days

However, we also need to consider the fact that the bank charges a discount rate of 12%, which means that Weber Services receives only 88% of the face value of the note ($10,000). We can calculate the actual amount received by Weber Services as follows:

$10,000 x 0.88 = $8,800

Therefore, the effective interest charged by the bank is:

($10,000 - $8,800) / $10,000 x 360 / 15 = 28.8%, which is higher than the bank's stated discount rate of 12%.

To avoid this steep effective interest rate, Weber Services should look for alternative sources of financing.

Question 11

Mountain Site discounts a customer's 10%,$7,000,90-day note dated August 1,on September 20.The discount period is 40 days,and the bank discount rate is 18%.The maturity value of the note is $7,175.The bank discount is $143.50.The proceeds of the note are:
A)$7,041.50.
B)$7,031.50.
C)$6,856.50.
D)$7,000.00.

Accepted Answer

To calculate the proceeds of the note, we need to first find the amount due to the customer at maturity:
Maturity value = Note amount + Interest
$7,175 = $7,000 + Interest
Interest = $175

Next, we need to find the bank discount:
Bank discount = Note amount x Discount rate x Time
Bank discount = $7,000 x 0.18 x (40/360)
Bank discount = $143.50

The proceeds of the note is the amount due to the customer minus the bank discount:
Proceeds = Maturity value - Bank discount
Proceeds = $7,175 - $143.50
Proceeds = $7,031.50

Therefore, the answer is B, $7,031.50.

Question 12

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 include a:
A)debit to Cash.
B)credit to Interest Income.
C)credit to Notes Receivable.
D)All of the above

Accepted Answer

When Ross discounts a note at the bank, he receives cash, which requires a debit to Cash. The discount represents interest income, so there is a credit to Interest Income. The note is no longer held by Ross, so there is a credit to Notes Receivable.

Question 13

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

Accepted Answer

The process is called note redemption or note conversion. Note trading refers to the buying and selling of notes between investors.

Question 14

The process of endorsing a note and transferring it to a financial institution is known as:
A)dishonoring a note receivable.
B)discounting a note receivable.
C)cosigning a note receivable.
D)collecting a note receivable.

Accepted Answer

The process of endorsing a note and transferring it to a financial institution is known as 'discounting a note receivable'. This is when the holder of the note (the payee) endorses it and sells it to a financial institution at a discount in exchange for cash. The financial institution then holds the note and collects the full amount when it comes due.

Question 15

Marble Company discounts a customer's 10%,$7,000,90-day note dated August 1,on September 20.The discount period is 40 days,and the bank discount rate is 15%.The maturity value of the note is $7,175.The bank discount is:
A)$95.62.
B)$31.88.
C)$119.58.
D)$43.25.

Accepted Answer

First, calculate the maturity date of the note: August 1 + 90 days = October 30. 
Then, calculate the end of the discount period: August 1 + 40 days = September 10. 
Since the company discounted the note on September 20, the note was not discounted within the discount period. 
To calculate the bank discount: 
Maturity value x Discount rate x Time 
$7,000 x 0.15 x (50/360) = $119.58 
Therefore, the bank discount is $119.58.

Question 16

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):
A)contra-liability.
B)absolute liability.
C)contingent liability.
D)regular liability.

Accepted Answer

Major's liability is contingent because it depends on the occurrence of a future event (Minor's failure to pay) and is not yet a certain liability.

Question 17

The entry to record the cash received on a customer's note discounted at less than face value would include a:
A)credit to interest income.
B)debit to notes receivable.
C)debit to interest expense.
D)All of the above

Accepted Answer

The answer of The entry to record the cash received...

Question 18

Steadman's Computer endorses a customer's note dated June 17 to the bank on August 6.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:
A)31 days.
B)60 days.
C)81 days.
D)0 days.

Accepted Answer

The discount period is the time between the endorsement date (August 6) and the maturity date (September 6). That is a total of 31 days. The bank discount rate of 12% is not used to calculate the discount period, but rather to calculate the amount that the bank will pay for the note (which is less than the face value).

Question 19

A $5,500,10% note dated May 20 for 78 days was discounted on June 23 at 12%.The number of days in the discount period is:
A)78 days.
B)39 days.
C)44 days.
D)some other number.

Accepted Answer

First, we need to find the maturity date of the note:
May 20 + 78 days = July 7

Next, we need to find the discount period:
June 23 - May 20 = 34 days

Finally, we need to find the remaining days to maturity:
July 7 - June 23 = 14 days

Since the note was discounted on June 23, and the discount period is the period between the date of the discount and the maturity date, the number of days in the discount period is 34 days.

Question 20

The discount period on a discounted note is:
A)the same as the original period of the note.
B)the time between the original date and the discount date.
C)the time between the discount date and the maturity date.
D)the original note period minus 10 days.

Accepted Answer

The discount period is the time between the discount date and the maturity date. This is the period during which the holder of the note can receive the discount. The discount date is the date on which the note is discounted, and is usually a few days after the date on the note. The original period of the note is not necessarily the same as the discount period, and it is not always reduced by a set number of days.

Quiz 14: Notes Receivable and Notes Payable

Prepare journal entries for the following transactions for Grant Company: May 1 Purchased equipment from Knox,Inc.for $5,000 giving a 3 month 8% note Aug.1 Paid amount due on note

The proceeds from discounting a note receivable are the:

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:

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

A $5,500,10% note dated May 20 for 78 days was discounted on June 23 at 12%.The amount of the discount (using a 360-day year) is:

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

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

On March 5,Weber Services discounts a customer's 9%,60-day,$10,000 note dated January 20.The discount rate charged by the bank is 12%.The discount period is:

Mountain Site discounts a customer's 10%,$7,000,90-day note dated August 1,on September 20.The discount period is 40 days,and the bank discount rate is 18%.The maturity value of the note is $7,175.The bank discount is $143.50.The proceeds of the note are:

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 include a:

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

The process of endorsing a note and transferring it to a financial institution is known as:

Marble Company discounts a customer's 10%,$7,000,90-day note dated August 1,on September 20.The discount period is 40 days,and the bank discount rate is 15%.The maturity value of the note is $7,175.The bank discount is:

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) :

The entry to record the cash received on a customer's note discounted at less than face value would include a:

Steadman's Computer endorses a customer's note dated June 17 to the bank on August 6.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:

A $5,500,10% note dated May 20 for 78 days was discounted on June 23 at 12%.The number of days in the discount period is:

The discount period on a discounted note is: