Question 1

Interest expense is on a merchandise company's income statement under the heading:

Accepted Answer

Interest expense is typically listed under "Other Expenses" or directly as "Interest Expense" on a company's income statement, as it is not directly related to the core operations of a merchandise company.

Question 2

Chase Hunford negotiated a $40,000 bank loan for 240 days at a bank rate of 10%.The bank deducted the interest in advance.
Required (show your calculations):
a)Calculate the amount of interest charged by the bank.
b)Calculate the amount of cash Chase received from the bank.
c)Calculate the effective interest rate charged by the bank.
d)Prepare Chase's journal entry for the transaction.

Accepted Answer

The answer of Chase Hunford negotiated a $40,000 bank loan...

Question 3

The discount period begins when the note is discounted and ends with the maturity date.

Accepted Answer

The discount period refers to the time span between the date when the note is discounted (or sold) and its maturity date, during which the interest or discount is calculated.

Question 4

Accrued interest on a note payable would have which effect on the categories?

Accepted Answer

Accrued interest on a note payable represents an obligation to pay additional money in the future, which increases the total amount of liabilities owed by the company.

Question 5

Purchased merchandise (periodic)issuing a note would have which effect on the categories?

Accepted Answer

Issuing a note would increase the total liabilities as the company would owe money to the creditor. It would also decrease owner's equity as the company's obligation to pay would reduce the value of the assets. Therefore, both option B and C would be correct.

Question 6

There was no accrual for interest on a promissory note receivable; this error would cause:

Accepted Answer

The answer of There was no accrual for interest on...

Question 7

The journal entry to record the payment of a discounted note at maturity is a debit to Notes Payable and Interest Expense,and a credit to Cash.

Accepted Answer

The answer of The journal entry to record the payment...

Question 8

When calculating the interest on a note receivable 365 days instead of 360 days was used.This error would cause:

Accepted Answer

The answer of When calculating the interest on a note...

Question 9

When paying off a note payable,last year's accrual was ignored and the total interest was recorded as an expense.This error would cause:

Accepted Answer

Ignoring last year's accrual would result in the interest expense being understated. As a result, the period's net income would be understated.

Question 10

The accounting department forgot to adjust for interest on the note payable.This error would cause:

Accepted Answer

The interest on the note payable is a liability. If it is not adjusted, the liabilities will be understated.

Question 11

The proceeds of a discounted note are the face value less the bank discount.

Accepted Answer

The answer of The proceeds of a discounted note are...

Question 12

Sold merchandise on account would have which effect on the following categories?

Accepted Answer

Selling merchandise on account means the customer owes the business money, which increases the total amount of accounts receivable. This transaction also generates revenue for the business, thus increasing total revenues. There is no effect on total liabilities. Therefore, both option A and B are correct.

Question 13

A promissory note from the sales of merchandise would have which effect on the categories?

Accepted Answer

When a promissory note is received from the sales of merchandise, it increases total assets because the promissory note is considered a receivable, which is an asset.

Question 14

The adjusting entry for accrued interest on a notes receivable includes:

Accepted Answer

The adjusting entry for accrued interest on a notes receivable involves recognizing interest revenue that has been earned but not yet received. The correct entry is a debit to Accrued Interest Receivable, as this represents the amount of interest earned but not yet received, and a credit to Interest Revenue, as this represents the revenue earned from the notes receivable. Therefore, option B is the correct answer.

Question 15

An adjustment that must be made for the interest on a note payable that is incurred during the period but not paid or recorded because payment is not due is called:

Accepted Answer

When interest on a note payable is incurred during the accounting period but not yet paid, an adjusting entry is required to recognize the expense that has been incurred but not yet recorded. This adjustment is called Accrued Interest Expense. Thus, option C is the correct answer. Option A refers to the liability account, and option B and D are not compatible with this scenario.

Question 16

The proceeds can never be less than the face value.

Accepted Answer

The proceeds from selling a bond can be less than its face value if the bond is sold at a discount, which occurs when the market interest rates are higher than the bond's coupon rate.

Question 17

Accrued interest resulting from a trade note receivable would have which effect on the categories?

Accepted Answer

Accrued interest on a trade note receivable represents an amount that the company is entitled to receive in the future, thus it is considered as an asset and would increase the total assets of the company. It does not affect total liabilities or owner's equity.

Question 18

Smyth Company borrows $5,000 by giving the bank its own 8%,90-day note.The bank discounts the interest.The effective interest rate is

Accepted Answer

To find the effective interest rate, we need to use the following formula:
Effective interest rate = (interest paid / amount borrowed) x (360 / days loan is outstanding)

The interest paid is 8% of $5,000, which is $400. The amount borrowed is $5,000. The loan is outstanding for 90 days. The bank discounts the interest, so Smyth Company only receives $4,600 ($5,000 - $400).

Plugging in these values to the formula:
Effective interest rate = (400 / 4,600) x (360 / 90) = 0.087 or 8.16%

Therefore, the answer is C) 8.16%.

Question 19

On June 1,Mike's Motorcycle Shop accepted a 120-day,8%,$10,000 note from a customer from the sale of a motorcycle.On July 1,after 30 days,Mike discounted the note at First Bank at 10%.Record the journal entries for Mike's Motorcycles.

Accepted Answer

The answer of On June 1,Mike's Motorcycle Shop accepted a...

Question 20

Interest income is on a merchandise company's income statement under the heading:

Accepted Answer

Interest income would be reported under the heading "Other Income" or specifically "Interest Income" on a merchandise company's income statement. It would not be reported under Sales Revenue or Unearned Revenue as those categories are typically reserved for sales of goods or services. Notes Receivable is a balance sheet account representing amounts owed to the company and is not reported on the income statement.

Quiz 14: Notes Receivable and Notes Payable