Deck 17: Accounting for Notes and Interest

Question 1

A three-month note dated April 1 would be due on July 1.

Answer 1

True

Question 2

The time of the note consists of the days or months from the date of issue to the date of the note's maturity.

Answer 2

True

Question 3

The total of the notes payable register should agree with the total of the notes receivable account in the general ledger.

Answer 3

False

Question 4

A promissory note may be interest bearing or non-interest bearing.

Question 5

When a bank collects a notes receivable, it notifies the payee that the net amount has been added to the payee's account by using a credit advice.

Question 6

A promissory note is usually referred to as a "note."

Question 7

If the maker of a note refuses or is unable to pay or renew it at maturity, the note is said to be dishonored.

Question 8

The account that is credited for accrued interest on notes receivable is Interest Receivable.

Question 9

Interest = Principal × Rate × Time.

Question 10

When the term of a note is specified in days, time is computed using the exact number of days from the date of the note to the date of its maturity.

Question 11

A 90-day note dated July 9 would be due on October 9.

Question 12

The proper entry to make when a note is paid at maturity depends on whether it is an interest-bearing or a non-interest-bearing note.

Question 13

If the time of the note is stated in days, the due date is the specified number of days after the issue date.

Question 14

The principal of the note is the face amount that the maker promises to pay at maturity.

Question 15

When a note receivable matures, the amount must be paid directly to the payee.

Question 16

The maker of the note is the one who is to receive the specified amount of money.

Question 17

A promissory note must be signed by the maker of the note.

Question 18

A written promise to pay a specific sum of money at a definite future date is called a promissory note.

Question 19

An auxiliary record of notes receivable that provides detailed information about the notes held by a business is known as a notes receivable register.

Question 20

The maker of the note is the one who promises to pay a certain amount of money at a definite future time.

Question 21

In preparing the financial statements at the end of the year, the account Accrued Interest Payable is reported on the income statement.

Question 22

The net amount received from the bank on a discounted note receivable is called the proceeds.

Question 23

On a non-interest bearing, discounted note, it is possible for the stated interest rate to differ from the effective interest rate.

Question 24

A note on which no rate of interest is specified is a(n)

A) market-rate note.
B) interest-bearing note.
C) non-interest-bearing note.
D) variable note.

Question 25

For notes payable issued in one period and due in the following period, accrued interest payable must be recorded at the end of the period.

Question 26

In preparing the financial statements at the end of the year, the balance in the interest receivable account will be reported on the balance sheet as a current asset.

Question 27

The correct entry to make when a note is paid at maturity depends on whether the note is interest bearing or non-interest bearing.

Question 28

Under accrual accounting, revenue is recognized when it is earned; therefore, accrued interest must be recorded at the end of the period.

Question 29

Maturity value is equal to face value plus interest.

Question 30

The amount of interest on a 10% note of $600 dated May 7 and due July 18 would be $12.00.

Question 31

An auxiliary record of notes payable that provides detailed information about the notes owed by a business is known as a notes payable journal.

Question 32

Accrued interest on notes payable is interest expense that has been incurred but not paid.

Question 33

The stated rate of interest is always the same as the effective rate of interest.

Question 34

A debit balance in the discount on notes payable account will normally become a debit to Interest Expense.

Question 35

The information contained in the notes receivable register normally is obtained from the general ledger accounts.

Question 36

The account, Discount on Notes Payable, is a contra-liability account.

Question 37

If a business needs cash before the due date of a note, it can endorse the note and transfer it to a bank.

Question 38

When commercial banks deduct interest in advance on a note, the procedure is known as discounting.

Question 39

In computing interest, it is customary to consider 360 days as a year.

Question 40

To obtain an extension of time for the payment of an account, a customer may issue a note for all or part of the amount due.

Question 41

A $7,300, 11.9% note is dated April 21 and is due in 60 days. The amount of interest on the due date of the note would be

A) $119.00.
B) $60.00.
C) $73.00.
D) $144.78.

Question 42

When a bank collects a note for the holder, it notifies the holder on a form called a

A) debit advice.
B) proceed report.
C) collection report.
D) credit advice.

Question 43

The one who is to receive the specified amount of money from a note is called the

A) maker of the note.
B) payee of the note.
C) discounter of the note.
D) endorser of the note.

Question 44

An auxiliary record of notes receivable that provides detailed information about notes held by a business is known as a

A) notes receivable register.
B) notes receivable worksheet.
C) notes receivable report.
D) schedule of notes receivable.

Question 45

When a note is received from a customer to obtain an extension of time for payment on a past-due account, the journal entry would include

A) debiting Accounts Receivable and crediting Notes Receivable.
B) debiting Accounts Payable and crediting Notes Payable.
C) debiting Notes Payable and crediting Accounts Payable.
D) debiting Notes Receivable and crediting Accounts Receivable.

Question 46

Which of the following consists of the days or months from the date of issue of a note to the date of its maturity?

A) rate of interest
B) principal of the note
C) time of the note
D) discount of the note

Question 47

The journal entry for accrued interest on a note payable includes

A) crediting Interest Expense.
B) debiting Accrued Interest Receivable and crediting Interest Revenue.
C) debiting Accrued Interest Payable and crediting Interest Expense.
D) debiting Interest Expense and crediting Accrued Interest Payable.

Question 48

The person who promises to pay a certain amount of money at a definite future time is called the

A) maker of the note.
B) payee of the note.
C) discounter of the note.
D) endorser of the note.

Question 49

Face value of a note plus interest is called the

A) discount.
B) proceeds.
C) principal.
D) maturity value.

Question 50

Maturity value minus the discount amount is called the

A) discount.
B) proceeds.
C) principal.
D) maturity value.

Question 51

In calculating interest on a note, it is necessary to take which of the following factors into consideration?

A) the principal
B) the maker
C) the payee
D) the bank

Question 52

When a business endorses a note and transfers it to a bank, the process is called

A) discounting a note receivable.
B) cosigning a note receivable.
C) collecting a note receivable.
D) dishonoring a note receivable.

Question 53

Which of the following is usually expressed in the form of a percentage?

A) rate of interest
B) principal of the note
C) time of the note
D) discount of the note

Question 54

A $5,000, 12% note is dated April 10 and is due in 90 days. The due date would be

A) June 9.
B) June 10.
C) July 9.
D) July 10.

Question 55

When the holder of an interest-bearing note is unable to collect the note when due, the journal entry includes

A) debiting Notes Receivable and crediting Accounts Receivable.
B) debiting Notes Receivable and crediting Accounts Receivable and Interest Revenue.
C) debiting Accounts Receivable and crediting Interest Revenue.
D) debiting Accounts Receivable and crediting Notes Receivable and Interest Revenue.

Question 56

When a company pays cash to redeem a interest-bearing-note, the transaction includes

A) debiting Cash and crediting Notes Payable.
B) debiting Cash and Interest Expense and crediting Notes Payable.
C) debiting Notes Payable and crediting Cash.
D) debiting Cash and crediting Notes Receivable.

Question 57

A $6,700, 8.5% note is dated April 10 and is due in 75 days. The maturity value of the note would be

A) $6,800.00.
B) $6,818.65.
C) $7,500.00.
D) $7,075.00.

Question 58

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

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

Question 59

The face amount of a note that is promised to be paid at maturity is called the

A) rate of interest.
B) principal of the note.
C) time of the note.
D) discount of the note.

Question 60

The adjusting entry for accrued interest on a notes receivable includes

A) debiting Interest Expense and crediting Interest Revenue.
B) debiting Accrued Interest Receivable and crediting Interest Revenue.
C) debiting Interest Revenue and crediting Accrued Interest Payable.
D) debiting Accrued Interest Receivable and crediting Interest Payable.

Question 61

From the information given below, compute the time in days for the following notes: From the information given below, calculate the accrued interest for the following notes (round to two decimal places, if necessary):

Question 62

Match the terms with the definitions.a.accrued interest on notes payable
b.time
c.proceeds (note receivable)
d.principal of the note
e.notes payable register
f.credit advice
g.maturity value
h.discounting a note receivable
i.dishonored
j.effective rate
k.promissory note
l.maker
The person or business agreeing to make the payment on a note.

Question 63

For the following notes, calculate the due date.

Question 64

Match the terms with the definitions.a.accrued interest on notes payable
b.time
c.proceeds (note receivable)
d.principal of the note
e.notes payable register
f.credit advice
g.maturity value
h.discounting a note receivable
i.dishonored
j.effective rate
k.promissory note
l.maker
Interest expense that has been incurred but not paid.

Question 65

Match the terms with the definitions.a.accrued interest on notes payable
b.time
c.proceeds (note receivable)
d.principal of the note
e.notes payable register
f.credit advice
g.maturity value
h.discounting a note receivable
i.dishonored
j.effective rate
k.promissory note
l.maker
A written promise to pay a specific sum at a definite future date.

Question 66

When a company pays an interest-bearing note payable on the due date, the journal entry on the books of the company making the payment includes

A) debiting Notes Payable and Interest Expense and crediting Cash.
B) debiting Cash and crediting Notes Payable and Interest Expense.
C) debiting Notes Payable and Cash and crediting Interest Revenue.
D) debiting Cash and Interest Expense and crediting Notes Payable.

Question 67

Match the terms with the definitions.a.accrued interest on notes payable
b.time
c.proceeds (note receivable)
d.principal of the note
e.notes payable register
f.credit advice
g.maturity value
h.discounting a note receivable
i.dishonored
j.effective rate
k.promissory note
l.maker
A detailed auxiliary record of notes payable.

Question 68

American Bank has loaned $12,000 to Shoreline Petroleum Inc. using a 60-day non-interest-bearing note. The bank discounted the note at 12%. The proceeds of the loan will be

A) $12,000.
B) $11,760.
C) $240.
D) $12,240.

Question 69

Match the terms with the definitions.a.accrued interest on notes payable
b.time
c.proceeds (note receivable)
d.principal of the note
e.notes payable register
f.credit advice
g.maturity value
h.discounting a note receivable
i.dishonored
j.effective rate
k.promissory note
l.maker
The principal of the note plus interest.

Question 70

If the maker of a note does not pay or renew a note at maturity, the note is said to be

A) dishonored.
B) discounted.
C) discontinued.
D) dismantled.

Question 71

The interest due at maturity on a $489.52, 8% note, dated May 28 and due August 2 is

A) $4.37.
B) $6.04.
C) $7.18.
D) $6.30.

Question 72

Match the terms with the definitions.a.accrued interest on notes payable
b.time
c.proceeds (note receivable)
d.principal of the note
e.notes payable register
f.credit advice
g.maturity value
h.discounting a note receivable
i.dishonored
j.effective rate
k.promissory note
l.maker
The face amount of the note that the maker promises to pay at maturity. The base on which interest is calculated.

Question 73

When banks deduct interest on a note in advance, this procedure in known as

A) endorsing.
B) recording.
C) securing.
D) discounting.

Question 74

From the information given below, determine the due date for the following notes: Compute the amount of accrued interest on the following notes: Compute the number of days from the issue date to the maturity date for the following notes:

Question 75

Federal Bank of America has loaned $9,000 to Southgate Animal Hospital, using a 90-day non-interest-bearing note. The bank discounted the note at 8%. The debit to Discount on Notes Payable in the general journal will be in the amount of

A) $9,000.00.
B) $8,820.00.
C) $180.00
D) $9,180.00.

Question 76

Prepare the general journal entries for the following notes payable transactions for the Village Dock Café. ​

Question 77

The discount on a note payable gradually becomes

A) interest expense.
B) interest revenue.
C) interest payable.
D) interest receivable.

Question 78

Calculate interest using a 360-day year.

Question 79

Prepare the general journal entries for Infinity Diner for the following notes receivable transactions (assuming there are 28 days in February). ​

Question 80

The account, Discount on Notes Payable, is a

A) contra-asset.
B) deferred charge.
C) contra-liability.
D) liability.