NOTE PAYABLE

Easy:

1. The interest deducted from the maturity value of a note is called

a. maturity value
b. face value
c. proceeds
d. discount

2. The journal entry a company uses to record the issuance of a discounted note for the
purpose of borrowing funds for the business is

a. debit Cash and Interest Expense; credit Notes Payable

b. debit Cash and Interest Payable; credit Notes Payable
c. debit Notes Payable; credit Cash
d. debit Accounts Payable; credit Notes Payable

3. As interest is recorded on an interest-bearing note, the Interest Expense account is

a. increased; the Interest Payable account is increased.

b. decreased; the Interest Payable account is increased.
c. increased; the Notes Payable account is decreased.
d. increased; the Notes Payable account is increased.

4. The maturity value of a P40,000, 90-day, 6% note payable is

a. 600
b. 40,600
c. 42,400
d. 2,400

5. The interest charged by the bank, at the rate of 6%, on a 90-day, discounted note payable for
P100,000 is

a. 6,000
b. 1,500
c. 1,000
d. 500

6. On June 8, Acme Co. issued an P80,000, 6%, 120-day note payable to Still Co. What is the
due date of the note?
 a. October 7
b. October 6
c. October 5
d. October 8

7. The journal entry a company uses to record the issuance of a note for the purpose of
converting an existing account payable would be

a. debit Cash; credit Notes Payable

b. debit Accounts Payable; credit Notes Payable
c. debit Accounts, Payable; credit Cash
d. debit Cash; credit Accounts Payable

8. On October 30, Santos Salon, Inc. issued a 90-day note with a face amount of P60,000 to
Charah Hair Products, Inc. for merchandise inventory. Determine the proceeds of the note
assuming the note is discounted at 8%.

a. 58,800
b. 64,800
c. 61,200
d. 55,200

9. The journal entry a company uses to record the issuance of a note for the purpose of
borrowing funds for the business is

a. debit Cash and Interest Expense; credit Notes Payable

b. debit Cash; credit Notes Payable
c. debit Accounts Payable; credit Notes Payable
d. debit Notes Payable; credit Cash

10. Notes may be issued

a. when borrowing money

b. when assets are purchased
c. to creditor's to temporarily satisfy an account payable created earlier
d. all of the answers are correct

11. The journal entry a company uses to record the payment of an ordinary note is

a. debit Notes Payable and Interest Receivable; credit Cash

b. debit Cash; credit Notes Payable
c. debit Notes Payable and Interest Expense; credit Cash
 d. debit Accounts Payable; credit Cash

12. The journal entry a company uses to record the payment of a discounted note is

a. debit Accounts Payable; credit Cash

b. debit Notes Payable and Interest Expense; credit Cash
c. debit Cash; credit Notes Payable
d. debit Notes Payable; credit Cash

13. On June 8, Acme Co. issued an P80,000, 6%, 120-day note payable on an overdue account
payable to Still Co. Assume that the fiscal year of Acme Co. ends June 30. Which of the
following relationships is true?

a. Acme is the creditor and credits Accounts Receivable

b. Still is the creditor and debits Accounts Receivable
c. Acme is the borrower and debits Accounts Payable
d. Still is the borrower and credits Accounts Payable

14. The journal entry to record the conversion of an P250 accounts payable to a notes payable
would be:

a. Jan 31 Accounts Payable (250); Notes Payable (250)

b. Jan 31 Notes Receivable (250); Notes Payable (250)
c. Jan 31 Notes Payable (250); Cash (250)
d. Jan 31 Cash (250); Notes Payable (250)

15. The current portion of long-term debt should

a. be paid immediately.
b. be classified as a long-term liability.
c. be reclassified as a current liability.
d. not be separated from the long-term portion of debt.

16. The maturity value of an interest-bearing note payable is the

a. face value
b. face value plus the interest
c. face value minus the interest
d. interest

Average:
17. Gray County Bank agrees to lend the Starkwood Building Company P100,000 on January 1.
Starkwood Building Company signs a P100,000, 9%, 9-month note. What entry will
Starkwood Building Company make to pay off the note and interest at maturity assuming
that interest has been accrued to September 30?

a. Interest Expense (6,750); Notes Payable (100,000); Cash (106,750)

b. Interest Payable (9,000); Notes Payable (100,000); Cash (109,000)
c. Notes Payable (100,000); Interest Payable (6,750); Cash (106,750)
d. Notes Payable (106,750); Cash (106,750)

18. A business borrowed P40,000 on March 1 of the current year by signing a 30 day, 6% interest
bearing note. When the note is paid on March 31, the entry to record the payment should
include a

a. credit to Cash for P42400

b. credit to Cash for P40,000
c. debit to Interest Payable P200
d. debit to Interest Expense P200

19. On June 8, Acme Co. issued an P80,000, 6%, 120-day note payable to Still Co. Assume that
the fiscal year of Still Co. ends June 30. What is the amount of interest revenue recognized
by Still in the following year?

a. 1,306.67
b. 1,600.00
c. 1,208.89
d. 1,200.00

20. Miller Co. issued a P35,000, 60-day, discounted note to River City Bank. The discount rate is
6%. What is the maturity value of the note?

a. 35,350
b. 37,100
c. 34,650
d. 35,000

21. Proceeds of P48,750 were received from discounting a P50,000, 90-day note at a bank. The
discount rate used by the bank in computing the proceeds was

a. 10.00%
b. 6.25%
c. 9.75%
d. 10.26%
22. On June 8, Acme Co. issued an P80,000, 6%, 120-day note payable to Still Co. Assume that
the fiscal year of Acme Co. ends June 30. What is the amount of interest expense recognized
by Acme in the current fiscal year?

a. 1,600.00
b. 400.00
c. 293.33
d. 391.10

23. Which of the following is true of accrued interest on bonds that are sold between interest
dates?

a. No correct answer from given choices

b. The accrued interest is computed at the effective rate
c. The accrued interest will be paid to the seller when the bonds mature
d. The accrued interest is extra income to the buyer

24. The maturity value of a P15,000, 60-day, 5% note payable is:

a. 15,125
b. 125
c. 750
d. 15,750

25. On October 30, Santos Salon, Inc. issued a 90-day note with a face amount of P60,000 to
Charah Hair Products, Inc for merchandise inventory. Determine the adjusting entry for
Santos on December 31 assuming the note carries an interest rate of 8%.

a. Interest Receivable (1,200); Interest Revenue (1,200)

b. Interest Expense (1,200); Interest Payable (1,200)
c. Interest Receivable (800); Interest Revenue (800)
d. Interest Expense (800); Interest Payable (800)

26. Gray County Bank agrees to lend the Starkwood Building Company P100,000 on January 1.
Starkwood Building Company signs a P100,000, 9%, 9-month note. What is the adjusting
entry required if Starkwood Building Company prepares financial statements on June 30?

a. Interest Expense (9,000); Interest Payable (9,000)

b. Interest Expense (4,500); Interest Payable (4,500)
c. Interest Payable (4,500); Interest Expense (4,500)
d. Interest Expense (6,750); Interest Payable (6,750)

27. Chu Co. issued a P50,000, 60-day, discounted note to River City Bank. The discount rate is
6%. The cash proceeds to Chu Co. are
 a. 50,500
b. 50,250
c. 49,500
d. 50,250

28. On June 8, Acme Co. issued an P80,000, 6%, 120-day note payable to Still Co. What is the
maturity value of the note?

a. 80,100
b. 81,200
c. 81,600
d. 84,800

29. Gray County Bank agrees to lend the Starkwood Building Company P100,000 on January 1.
Starkwood Building Company signs a P100,000, 9%, 9-month note. The entry made by
Starkwood Building Company on January 1 to record the proceeds and issuance of the note
is

a. Cash (100,000); Interest Expense (9,000); Notes Payable (109,000); Interest Payable (4,500)
b. Cash (100,000); Interest Expense (9,000); Notes Payable (109,000)
c. Cash (100,000); Notes Payable (100,000)
d. Interest Expense (9,000); Cash (91,000); Notes Payable (100,000)

Difficult:

30. A company has in issue loan notes with a nominal value of P100 each. Interest on the loan
notes is 6% per year, payable annually. The loan notes will be redeemed in eight years time
at a 5% premium to nominal value. The before-tax cost of debt of the company is 7% per
year.

What is the ex-interest market value of each loan note?

a. 96.94
b. 103.10
c. 94.03
d. 102.91

SOLUTION:
Market value = (6 x 5.971) + (105 x 0.582) = 35.83 + 61.11 = P96.9

Undefined:
31. On December 31, 2015, Roth Company issued a P1,000,000 face value note payable to Wake
Company in exchange for services rendered to Roth. The note, made at usual trade terms, is
due in nine months and bears interest, payable at maturity, at the annual rate of 3%. The
market interest rate is 8%. The compound interest factor of 1 due in nine months at 8% is .
944.

At what amount should the note payable be reported on December 31, 2015?

a. 1,030,000
b. 1,000,000
c. 965,200
d. 944,000

32. Loob Company had the following loans at 12% interest payable at maturity. Loob repaid
each loan on scheduled maturity date.

Date Amount Maturity date Term

11/1/2014 500,000 10/31/2015 1 year
2/1/2015 1,500,000 7/31/2015 6 months
5/1/2015 800,000 1/31/2016 9 months

The entity recorded interest expense when the loans are repaid. As a result, interest expense
of P150,000 was recorded in 2015.

If no correction is made, by what amount would 2015 interest expense be understated?

a. 54,000
b. 62,000
c. 64,000
d. 72,000

33. On December 31, 2015, Boston Company purchased a machine from Helix Company in
exchange for a noninterest bearing note requiring eight payments of P200,000. The first
payment was made on December 31, 2015 and the others are due annually on December 31.
At date of issuance, the prevailing rate of interest for this type of note was 11%. The PV of
an ordinary annuity of 1 at 11% for 8 periods is 5.146 and the PV of an annuity of 1 in
advance at 11% for 8 periods is 5.712.

On December 31, 2015, what is the carrying amount of the note payable?

a. 1,142,400
b. 1,029,200
 c. 1,046,200
d. 942,400

34. On March 1, 2015, Fine Company borrowed P1,000,000 and signed a 2-year note bearing
interest at 12% per annum compounded annually. Interest is payable in full at maturity on
February 28, 2017.

What amount should be reported as accrued interest payable on December 31, 2016?

a. 100,000
b. 120,000
c. 232,000
d. 240,000

35. On January 1, 2015, Solemn Company sold land to Glory Company. There was no
established market price for the land. Glory gave Solemn a P2,400,000 noninterest bearing
note payable in three equal annual installments of P800,000 with the first payment due
December 31, 2015.

The note has no ready market. The prevailing rate of interest for a note of this type is 10%.
Use three decimal places for the PV factor.

What is the carrying amount of the note payable on December 31, 2015?

a. 1,989,600
b. 2,126,400
c. 1,388,560
d. 2,400,000

36. Jason Company offered a contest in which the winner would receive P1,000,000 payable
over twenty years. On December 31, 2015, Jason Company announced the winner of the
contest and signed a note payable to the winner for P1,000,000 payable in P50,000
installments every January 2.

Also on December 31, 2015, Jason Company purchased an annuity for P418,250 to provide
the P950,000 prize remaining after the first P50,000 installment which was paid on January 2,
2016.

On December 31, 2015, what amount should be reported as note payable-contest winner, net
of current portion?

a. 368,350
b. 418,250
 c. 900,000
d. 950,000

What amount should be reported as contest prize expense for 2015?

a. 1,000,000
b. 418,250
c. 468,250
d. 0

37. On July 1, 2015, Justine Company borrowed P1,000,000 on a 10% five-year note payable. On
December 31, 2015, the fair value of the note is determined to be P975,000 based on market
and interest factors. The entity has elected the fair value option for reporting the financial
liability.

What amount should be reported as interest expense for 2015?

a. 100,000
b. 97,500
c. 50,000
d. 48,750

What is the carrying amount of the note payable on December 31, 2015?

a. 1,000,000
b. 975,000
c. 500,000
d. 900,000

What is the gain or loss to be recognized in 2015 as a result of the fair value option?

a. 25,000 gain
b. 25,000 loss
c. 12,500 gain
d. 0

At what amount should the discount on note payable be presented on December 31, 2015?

a. 25,000
b. 380,000
c. 100,000
d. 0
38. Witt Company reported the following liability account balances on December 31, 2015:

8% note payable issued April 1, 2014 maturing April 1, 2016 800,000

6% note payable issued October 1, 2014 maturing September 30, 2016 500,000

The December 31, 2015 financial statements were issued on March 31, 2016.

On December 31, 2016, the entire P800,000 balance of 8% note was refinanced by issuance of
a long-term obligation payable in a lump sum.

In addition, on March 15, 2016, the entity consummated a noncancelable agreement with the
lender to refinance the 6% P500,000 note on a long-term basis.

On December 31, 2015, what amount of the notes payable should be classified as current?

a. 1,300,000
b. 500,000
c. 800,000
d. 0

39. Dana Company had P2,000,000 note payable due on June 30, 2016. Under the existing loan
facility, the entity had the discretion to refinance or roll over the note payable for at least
twelve months after the end of reporting period.

On December 31, 2015, what amount of the note payable should be reported as current
liability?

a. 2,000,000
b. 2,400,000
c. 3,000,000
d. 0

40. An entity shall measure initially a note payable not designated at fair value through profit
or loss at

a. Face amount
b. Fair value
c. Fair value plus transaction cost
d. Fair value minus transaction cost

41. Under the fair value option, an entity shall measure the note payable initially at

a. Face amount
 b. Fair value plus transaction cost
c. Fair value minus transaction cost
d. Fair value

42. Which of the following statements is true in relation to the fair value option of measuring
note payable?

a. At initial recognition, an entity may irrevocably designate the note payable as at fair
value through profit or loss.
b. The interest expense on the note payable is recognized using the stated interest rate.
c. After initial recognition, the note payable is remeasured at fair value at every year-end
with changes in fair value generally recognized in other comprehensive income.
d. All of these statements are true.

43. An entity issued a note solely in exchange for cash. Assuming that the items listed below
differ in amount, the present value of the note at issuance is equal to

a. Face amount
b. Face amount discounted at the prevailing interest rate
c. Proceeds received
d. Proceeds received discounted at the prevailing interest rate

44. If the present value of a note issued in exchange for a property is less than its face amount,
the difference should be

a. Included in the cost of the asset

b. Amortized as interest expense over the life of the note
c. Amortized as interest expense over the life of the asset
d. Included in interest expense in the year of issuance

45. An entity borrowed cash from a bank and issued to the bank a short-term noninterest
bearing note payable. The bank discounted the note at 10% and remitted the proceeds to the
entity. The effective interest rate paid by the entity in this transaction would be

a. Equal to the stated discount rate of 10%

b. More than the stated discount rate of 10%
c. Less than the stated discount rate of 10%
d. Independent of the stated discount rate of 10%

46. At issuance date, the present value of a promissory note is equal to the face amount if the
note

a. Bears a stated rate of interest which is realistic

 b. Bears a stated rate of interest which is less than the prevailing market rate for similar
notes
c. Is noninterest bearing and the implicit interest rate is less than the prevailing market rate
for similar notes
d. Is noninterest bearing and the implicit interest rate is equal to the prevailing market rate
for similar notes

47. Which of the following statements concerning discount on note payable is incorrect?

a. Discount on note payable may be debited when entity discounts its own note with the
bank
b. The discount on note payable is a contra liability account which is shown as a deduction
from the note payable
c. The discount on note payable represents interest charges applicable to future periods
d. Amortizing the discount on note payable causes the carrying amount of the liability to
gradually decrease over the life of the note

48. A note payable with no ready market is exchanged for property whose fair value is
currently indeterminable. When such a transaction takes place

a. The present value of the note payable must be approximated using an imputed interest
rate
b. The note payable should not be recorded until the fair value of the property becomes
evident
c. The entity receiving the property should estimate a value for the property
d. Both entities involved in the transaction should negotiate a value to be assigned to the
property

49. When a note payable is issued for property, the present value of the note is measured by

a. The fair value of the property

b. The fair value of the note payable
c. Using an imputed interest rate to discount all future payments on the note payable
d. All of these are considered in measuring the present value of the note payable

50. On October 1, 2016, an entity borrowed cash and signed a three-year interest bearing note in
which both the principal and interest are payable on October 1, 2019. On December 31, 2018,
accrued interest should

a. Be reported as current liability

b. Be reported as noncurrent liability
c. Be reported as part of the note payable
d. Not be reported