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