True/False
Indicate whether the
statement is true or false.
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1.
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Notes payable are the primary medium of exchange for business
transactions.
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2.
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A promissory note, unlike a check, cannot be endorsed and transferred to a bank
in return for cash.
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3.
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The days, months, or years from the date of issue until a note is to be paid are
the time of a note.
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4.
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The percentage of the principal that is paid for use of the money is the
interest rate of a note.
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5.
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The amount that is due on the maturity date of a note is the maturity
value.
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6.
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The principal of a note is sometimes referred to as the face amount of a
note.
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7.
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Liabilities due within a short period of time are current liabilities.
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8.
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When a business issues a note payable, the principal of the note is credited to
a liability account.
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9.
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The interest accrued on a note payable is credited to an expense account.
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10.
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Issuing a note payable for an extension of time if unable to pay an account when
due eliminates the liability of the business issuing the note.
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11.
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When a business issues a note payable for an extension of time on its account
payable, the vendor account is credited.
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12.
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The date a note is written is not counted in calculating the maturity
date.
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13.
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Notes receivable paid within one year generally are classified as non-current
assets.
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14.
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A note is recorded as a note receivable by the person or business to whom the
amount of a note is payable.
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15.
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Using a receipt as the source document for recording cash received for a note
receivable is an application of the Objective Evidence concept.
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16.
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The interest earned on money loaned is interest income.
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17.
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When a business receives payment for a note receivable, Accounts Receivable is
credited.
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18.
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A note that is not paid when due is a dishonored note.
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19.
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Notes Receivable is an asset account and has a normal credit balance.
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20.
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Notes Payable is a liability account and has a normal credit balance.
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21.
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Interest expense on notes payable is a normal operating expense.
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22.
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When the timing of cash receipts and required cash payments do not match,
businesses usually deposit extra cash or borrow cash or make arrangements to delay payments.
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23.
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"Interest at 12 percent" means that 12 cents will be paid for the use
of each dollar borrowed for the time of a note.
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24.
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An individual with a car loan usually pays the note in partial payments that
include part of the principal and part of the interest on the note.
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25.
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In interest calculations, time can be expressed in whole years or as a fraction
of a year.
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26.
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The maturity value of a note is calculated by subtracting the interest rate from
the principal.
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27.
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The maturity value of a note is calculated by multiplying the interest rate
times the principal.
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28.
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The journal entry for signing a note payable includes a debit to Interest
Expense.
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29.
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The journal entry for paying a note payable includes a debit to Accounts Payable
to remove the balance owed.
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30.
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When a note receivable is dishonored, the company should immediately write off
the account receivable for that customer.
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Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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31.
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The person to whom the amount of a note is payable is ____.
a. | the account receivable | c. | the payee of the note | b. | the
customer | d. | none of the
above |
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32.
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The date a note is due is the ____.
a. | time of a note | c. | principal of a note | b. | date of a note | d. | maturity date of a
note |
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33.
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The number assigned to identify a specific note is ____.
a. | the number of a note | c. | the date of a note | b. | the time of a note | d. | none of the
above |
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34.
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An amount paid for use of money for a period of time is ____.
a. | the principal of a note | c. | the interest
rate | b. | the interest | d. | the none of the above |
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35.
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Interest on a promissory note is stated as ____.
a. | the total of the principal plus the interest | b. | a percentage of the
principal | c. | a number of cents on the dollar | d. | a given amount of
money |
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36.
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A partial payment made on a note includes ____.
a. | all interest until the total interest is paid | b. | all principal until
the total amount of principal is paid | c. | an amount rounded to the nearest
dollar | d. | part of the principal and part of the interest to be
paid |
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37.
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The interest on a 12 percent note for $1,000.00 for one year is ____.
a. | $10.00 | c. | $100.00 | b. | $12.00 | d. | $120.00 |
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38.
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The interest on a 12 percent note for $1,000.00 for 60 days is ____.
a. | $20.00 | c. | $60.00 | b. | $30.00 | d. | $80.00 |
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39.
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A 90-day note dated March 15 would be due on ____.
a. | June 13 | c. | June 15 | b. | June 14 | d. | June 16 |
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40.
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When a note payable is issued for cash, ____.
a. | Notes Payable is debited | c. | Interest Expense is
debited | b. | Cash is credited | d. | none of the above |
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41.
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The journal entry to pay principal and interest on a note payable is
____.
a. | debit Notes Payable; credit Cash and Interest Expense | b. | debit Notes Payable
and Interest Expense; credit Cash | c. | debit Cash; credit Notes Payable and Interest
Expense | d. | debit Cash and Notes Payable; credit Interest Expense |
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42.
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The journal entry for issuing a note payable for an extension of time on an
account payable is ____.
a. | debit Notes Payable; credit Cash | b. | debit Notes Payable and Interest Expense;
credit Cash | c. | debit Accounts Payable; credit Notes Payable | d. | debit Notes Payable;
credit Accounts Payable |
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43.
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The journal entry to record accepting a note receivable for an extension of time
is ____.
a. | debit Accounts Receivable; credit Notes Receivable | b. | debit Accounts
Receivable; credit Notes Receivable and Interest Income | c. | debit Notes
Receivable; credit Accounts Receivable | d. | debit Accounts Receivable; credit Notes
Receivable |
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44.
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The journal entry to record a dishonored note receivable is ____.
a. | debit Accounts Receivable; credit Notes Receivable | b. | debit Accounts
Receivable; credit Notes Receivable and Interest Income | c. | debit Notes
Receivable; credit Accounts Receivable | d. | debit Accounts Receivable; credit Notes
Receivable |
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45.
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The most useful evidence of a debt in a court of law is ____.
a. | an oral promise to pay | c. | an account payable | b. | an account receivable | d. | a signed note |
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46.
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The time of a note issued for less than one year is typically stated in
____.
a. | days | c. | fraction of a year | b. | months | d. | none of the
above |
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47.
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Notes Payable are classified as ____.
a. | current assets | c. | expenses | b. | current liabilities | d. | revenue |
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48.
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The source document for recording cash received from signing a note payable is a
____.
a. | receipt | c. | memorandum | b. | check | d. | copy of the
note |
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49.
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Interest expense of a business is ____.
a. | an additional cost of merchandise | c. | a financial
expense | b. | a normal operations expense | d. | a contra revenue account |
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50.
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Interest income of a business is ____.
a. | a normal operating revenue | c. | an investment | b. | an other
revenue | d. | an account
receivable |
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51.
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When a business accepts a note from a customer for an extension of time on
account, the customer's accounts receivable account is ____.
a. | not affected | b. | changed to a zero balance | c. | equal to the
principal plus interest of the note | d. | debited for the amount of the
note |
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52.
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Notes receivable are classified as ____.
a. | other expense | c. | current liabilities | b. | current assets | d. | other revenue |
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53.
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When a customer dishonors a note, ____.
a. | interest is earned but not recorded | c. | interest is both earned and
recorded | b. | no interest is earned | d. | none of the above |
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54.
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When a customer dishonors a note, the customer's account receivable is
____.
a. | written off | b. | debited for the amount of the note and
interest | c. | credited for the amount of the note and interest | d. | debited for the
amount of the note |
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55.
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Accepting a note receivable from a customer for an extension of time on account
____.
a. | is not a good business practice | b. | will always earn interest income for a
business | c. | will not earn interest income if the customer does not pay the note when it is
due | d. | changes the customer's account from a debit balance to a credit
balance |
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