Question 1

A 135-day note issued on May 17 will mature on:

Accepted Answer

To calculate the maturity date of a note, we add the number of days on the note to the issue date. So, adding 135 days to May 17 gives us September 29. Therefore, the correct answer is B.

Question 2

Using a 360-day year, the maturity value of a 90-day note for $42,000 at 8% annual interest is:

Accepted Answer

Using the 360-day year, the interest on the note is calculated as follows:
Interest = Principal * Rate * Time
where time is the fraction of the year, which in this case is 90/360 = 1/4

Interest = 42,000 * 0.08 * 1/4 = 840

Therefore, the maturity value of the note is the sum of the principal and interest, which is:

Maturity value = Principal + Interest = 42,000 + 840 = $42,840.00

Question 3

The maturity value is the sum of the principal plus the interest due at maturity.

Accepted Answer

The maturity value of a financial instrument is the total amount that will be paid at the end of its term, including both the principal amount and any interest that has accrued over the life of the instrument. So, the statement "the maturity value is the sum of the principal plus the interest due at maturity" is true.

Question 4

A promissory note is a verbal promise to pay a specified amount of money on a particular future date.

Accepted Answer

A promissory note is a written, not verbal, promise to pay a specified amount of money on a particular future date.

Question 5

Interest rates are almost always stated for a period of one month.

Accepted Answer

Interest rates can be stated for any period of time, such as one day, one week, one year, etc.

Question 6

Interest is an expense to the debtor and income to the creditor.

Accepted Answer

Interest represents the cost of borrowing money, and is therefore an expense for the borrower (debtor). On the other hand, the lender (creditor) earns interest income as compensation for lending their money.

Question 7

An 83-day note issued on November 13, 2014 will mature on:

Accepted Answer

The answer of An 83-day note issued on November 13,...

Question 8

The business or person that signs the promissory note and agrees to pay the required amount is called the payee.

Accepted Answer

The business or person that signs the promissory note and agrees to pay the required amount is called the maker or borrower. The payee is the person or entity that receives the payment.

Question 9

Using a 360-day year, the maturity value of a 60-day note for $24,000 at 7% annual interest is (rounded to the nearest cent):

Accepted Answer

The maturity value of a note includes both the principal amount and the interest earned. To calculate the interest: Interest = Principal × Rate × Time = $24,000 × 7% × (60/360) = $280. Therefore, the maturity value = Principal + Interest = $24,000 + $280 = $24,280.

Question 10

Using a 360-day year, the maturity value of a 60-day note for $5,000 at 8% annual interest is $67.

Accepted Answer

We can use the formula:

Maturity value = Principal + (Principal x Rate x Time)

Where Time is in years.

Using a 360-day year, we have Time = 60/360 = 1/6 years.

Substituting the given values, we get:

67 = 5000 + (5000 x 0.08 x 1/6)

Solving for the right side of the equation, we have:

67 = 5000 + 66.67

Which is not true. Therefore, the answer is B - False.

Question 11

On September 1, 2013, Sharp Corp. lent $2,400 to Marla Smith on a 6-month 4% promissory note. The journal entry to record the note for Sharp Corp. would be to:

Accepted Answer

The journal entry to record the note for Sharp Corp. would be to debit Note Receivable/M Smith, $2,400 and credit Cash, $2,400 because Sharp Corp. is receiving the note and Marla Smith is receiving the cash. No interest income is earned until the note matures. Note payable is not applicable in this scenario since Sharp Corp. is the lender, not the borrower.

Question 12

The amount loaned out by the payee is called the maturity value.

Accepted Answer

The amount loaned out by the payee is called the principal. The maturity value is the total amount that the payee will receive at the end of the loan, including any interest or fees.

Question 13

When counting the days of a note, one should remember to count the day the note was issued.

Accepted Answer

When counting the days of a note, the day the note was issued is not counted; the count starts the day after the note was issued.

Question 14

The payee of a note is also called the creditor.

Accepted Answer

The payee is the person or entity who receives payment, typically the one to whom the debt or obligation is owed, commonly referred to as the creditor.

Question 15

On March 1, 2014, Archer Inc. lent $37,000 to Ron Wood on a 1-year 3% promissory note. The amount of interest to be accrued on December 31 will be: (Do not round any intermediary calculations. Round your final answer to the nearest cent.)

Accepted Answer

To calculate the accrued interest, we need to use the formula:

Accrued Interest = Principal x Rate x Time

Where: 
- Principal = $37,000 
- Rate = 3% 
- Time = 10/12 (as Ron Wood has held the note for 10 months out of 12)

Accrued Interest = 37,000 x 0.03 x (10/12) = $925.00

Therefore, the answer is B.

Question 16

On September 1, 2013, Sharp Corp. lent $2,400 to Marla Smith on a 6-month 10% promissory note. The amount of interest to be accrued on December 31 will be:

Accepted Answer

The interest on the note for 4 months (September 1 to December 31) is calculated as follows: Interest = Principal × Rate × Time = $2,400 × 10% × (4/12) = $80.

Question 17

A 4-month promissory note dated on July 17 will be due on November 17.

Accepted Answer

A promissory note with a term of 4 months from July 17 will mature on November 17. Therefore, the statement is true.

Question 18

Using a 365-day year, the maturity value of a 180-day note for $3,000 at 9% annual interest is: (Do not round any intermediary calculations. Round your final answer to the nearest cent.)

Accepted Answer

The first step is to calculate the interest earned on the note:

Interest = Principal x Rate x Time
Interest = $3,000 x 9% x 180/365
Interest = $131.51

The maturity value of the note will be the sum of the principal and the interest earned:

Maturity Value = Principal + Interest
Maturity Value = $3,000 + $131.51
Maturity Value = $3,131.51

Therefore, the answer is choice C.

Question 19

On March 15, Diego paid $7,750 to Island, Inc. to fulfill his promissory note agreement. Of the $7,750, $750 is interest. The journal entry Island, Inc. will record is to:

Accepted Answer

Option B is the correct journal entry as it records the payment of the full amount of the note along with the interest earned. Debit Cash $7,750 represents the payment received by Island, Inc. Credit Note Receivable/Diego $7,000 represents the principal amount due on the note, and Credit Interest Revenue $750 represents the interest earned on the note.

Question 20

On August 9, Alice paid $3,568 to Cyrus Corp. to fulfill her promissory note agreement. Of the $3,568, $400 is interest. The journal entry Cyrus Corp. will record is to:

Accepted Answer

This journal entry reflects the payment made by Alice to Cyrus Corp., including both the principal amount of the promissory note (credited to Note Receivable/Alice) and the interest earned by Cyrus Corp. (credited to Interest Revenue). The Cash account is debited for the total payment received.

Quiz 7: Cash and Receivables