Ch 17 Accounting for Notes and Interest

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

True

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.

True

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.

True

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

True

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

True

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

True

Interest revenue that has been earned but not yet received is said to be ____________________.

accrued interest

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

payee of the note.

The detailed auxiliary record for notes receivable is called the ____________________.

notes receivable register

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

notes receivable register.

The face amount of the note that the maker promises to pay at maturity is known as the ____________________.

principal of a note

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

principal of the note.

The difference between the maturity value of the note and the bank discount is called the ____________________.

proceeds

Maturity value minus the discount amount is called the

proceeds.

A(n) ____________________ is a written promise to pay a specific sum at a definite future date.

promissory note

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

rate of interest

The ____________________ is expressed in months or days from the date of issue to the date of maturity.

term of a note

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

non-interest-bearing note.

To the maker of a note, the note is a(n) ____________________.

note payable

To the payee of a note, the note is a(n) ____________________.

note receivable

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

$11,760.

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

$144.78.

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

$180.00

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

$6,818.65.

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

$7.18.

In computing interest, it is common to use ____________________ days in a year.

360

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

True

____________________ is a procedure, which banks often use, deducting interest in advance when making a loan.

Discounting

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

False

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

False

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

False

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

False

The entry to make when a note is paid at maturity is the same regardless of whether the note is interest-bearing or non-interest bearing.

False

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

False

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

False

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

False

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

False

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

July 9.

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

True

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

True

Interest = Principal × Rate × Time.

True

Maturity value is equal to face value plus interest.

True

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

True

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

True

A 3 month note dated July 2 would mature on October 2.

True

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

True

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

True

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

True

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

True

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

True

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

True

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

True

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

True

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.

True

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

True

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

True

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

True

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

True

A(n) ____________________ has the potential of becoming a real liability depending on future events.

contingent liability

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

contingent liability.

The account, Discount on Notes Payable, is a

contra-liability.

A(n) ____________________ is the notification to the payee that the bank has collected interest on a note and added the amount to the payee's account.

credit advice

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

credit advice.

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

debiting Accounts Receivable and crediting Notes Receivable and Interest Revenue.

The adjusting entry for accrued interest on a note receivable includes

debiting Accrued Interest Receivable and crediting Interest Revenue.

The journal entry for accrued interest on a note payable includes

debiting Interest Expense and crediting Accrued Interest Payable.

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

debiting Notes Payable and Interest Expense and crediting Cash.

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

debiting Notes Payable and crediting Cash.

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

True

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.

True

Face value of a note plus interest is called the

maturity value.

The ____________________ is the person or business agreeing to make the payment on a note.

maker

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

maker of the note.

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

False

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

debiting Notes Receivable and crediting Accounts Receivable.

Transferring a note receivable to a bank for cash is called ____________________.

discounting a note

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

discounting a note receivable.

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

discounting.

When a note is ____________________, the maker does not pay or renew it at maturity.

dishonored

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

dishonored.

The ____________________ is the interest amount paid divided by the proceeds received on a discounted note.

effective rate

The discount on a note payable gradually becomes

interest expense.

A note with an explicit interest rate stated on the face of the note is a(n) ____________________.

interest-bearing note

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

the principal

The term of the note, stated as a fraction of a year, is known as the ____________________.

time

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

time of the note