ACC108: INTACC 3

P1Q2: NOTES PAYABLE

1. Which of the following is not true about the discount on short-term notes payable?
a. The Discount on Notes Payable account has a debit balance.
b. The Discount on Notes Payable account should be reported as an asset on the balance sheet.
c. When there is a discount on a note payable, the effective interest rate is higher than the stated rate.
d. All of these are true.

2. Interest expenses are incurred

a. only on interest-bearing liabilities.
b. only on liabilities that are discounted to their present values.
c. only on liabilities that are initially and subsequently measured at amortized cost
d. due to passage of time.

3. Which of the following represents a liability?

a. The obligation to pay interest on a five-year note payable that was issued on the last day of the current
year.
b. The obligation to pay for goods that an entity expects to order from suppliers next year.
c. The obligation to deliver goods that customers have ordered and paid for during the current year.
d. The obligation to distribute own shares of stocks next year as a result of a dividend declaration near the
end of the current year.

4. On January 1, 20x1, Washy-washy Co. acquired a washing machine by paying cash of ₱400,000 and issuing
a noninterest-bearing note of ₱4,000,000 due on January 1, 20x4. The effective interest rate on the note is
12%. How much is the interest expense in 20x1?
a. 341,656 b. 389,654 c. 334,357 d. 480,000

5. On January 1, 20x1, VELVETY SMOOTH Co. acquired an intangible asset by paying cash of ₱400,000 and
issuing a noninterest-bearing note payable of ₱4,000,000 due in 4 equal annual installments. The first
installment is due on January 1, 20x1. The prevailing rate of interest for this type of note is 12%. How much
is the interest expense in 20x1?
a. 0 c. 334,357
b. 288,220 d. 432,000

6. On January 1, 20x1, Spin Co. acquired an intangible asset by paying cash of ₱400,000 and issuing a
noninterest-bearing note payable of ₱4,000,000 due in 4 equal annual installments. The first installment is
due on January 1, 20x1, while the succeeding installments are due every December 31. The effective
interest rate is 12%. How much is the carrying amount of the note on December 31, 20x1?
a. 2,401,832 c. 2,188,776
b. 2,179,830 d. 1,690,051
7. On January 1, 20x1, Bath Co. issued a ₱4,800,000 noninterest-bearing note due in six equal semi-annual
payments starting July 1, 20x1. The effective interest rate is 10%. How much is the carrying amount of the
note on December 31, 20x1?
a. 3,463,580 c. 3,343,341
b. 2,279,830 d. 2,836,761

8. On January 1, 20x1, Warehouse Co. acquired a machine in exchange for a ₱4,800,000 noninterest-bearing
note due as follows:
Date Amount
December 31, 20x1 ₱ 2,400,000
December 31, 20x2 1,600,000
December 31, 20x3 800,000
Total ₱ 4,800,000
The prevailing rate of interest of this type of note is 10%. How much is the interest expense in 20x1?
a. 400,000 c. 410,581
b. 479,340 d. 410,518

9. On January 1, 20x1, Fate Co. purchased an inventory with a list price of ₱4,400,000 and a cash selling price
of ₱4,000,000 in exchange for a ₱4,800,000 noninterest-bearing note due on December 31, 20x3. The
carrying amount of the note on December 31, 20x1 is approximate equal to
a. 3,897,830 b. 4,000,000 c. 4,250,780 d. 4,362,036
10. Tweet Co. acquired a machine on January 1, 20x1 by paying cash of ₱400,000 and issuing a noninterest-
bearing note of ₱4,000,000 due in 4 equal annual installments starting on December 31, 20x1. The
prevailing rate of interest for this type of note is 12%. How much is the noncurrent portion of the note on
December 31, 20x1?
a. 1,468,050 c. 1,683,508
b. 1,476,996 d. 1,690,051

11. SUCCOR Co. issued a 3-year, noninterest-bearing note of ₱4,000,000 to RELIEF, Inc., a related party. The
proceeds from the issuance of the note were ₱4,000,000. The note matures on December 31, 20x3. The
prevailing interest for similar type of obligation is 12%. The entry on the initial recognition of the note
includes a
a. credit to notes payable for ₱2,847,120
b. debit to discount on notes payable for ₱1,152,880
c. credit to unrealized gain for ₱1,152,880
d. b and c
12. On January 1, 20x1, SAVOR TASTE Co. acquired a machine by issuing a 3-year, 3%, ₱4,000,000 note
payable. Principal is due on January 1, 20x4 but interests are to be paid annually. The prevailing interest rate
for this type of note is 12%. How much is the carrying amount of the note on December 31, 20x1?
a. 3,401,832 c. 3,288,776
b. 3,391,580 d. 3,505 ,464

13. A short-term, non-trade, note payable with no stated rate of interest issued in a transaction that contains a
significant financing component should be
a. recorded at maturity value.
b. recorded at the face amount.
c. discounted to its present value.
d. reported separately from other short-term notes payable.

14. When interest expense is calculated using the effective-interest amortization method, interest
expense (assuming that interest is paid annually) always equals the
a. actual amount of interest paid.
b. carrying amount of the note multiplied by the stated interest rate
c. carrying amount of the note multiplied by the effective interest rate.
d. maturity value of the note multiplied by the effective interest rate.

15. Loan origination fees are

a. added to the carrying amount of the loan payable and subsequently amortized using the straight-
line method.
b. recognized immediately as income
c. added to the carrying amount of the loan payable and subsequently amortized using the effective interest
method.
d. deducted from the carrying amount of the loan payable and subsequently amortized using
the effective interest method.

16. On August 1, 20x1, an entity acquired a new machine that it does not have to pay for until September 1,
20x5. The total payment on September 1, 20x5 will include both principal and interest. The initial
measurement of the note and the machine is equal to the
a. payment for the principal multiplied by PV of ₱1
b. payment for interest multiplied by PV of ordinary annuity of ₱1
c. a plus b
d. total payment on the note multiplied by PV of ₱1

17. When an entity issued a note solely in exchange for cash, 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

18. If the present value of a note issued in exchange for a property is less than 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

19. An entity borrowed cash from a bank and issued to the bank a short-term non interest 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%

20. The discount resulting from the determination of the present value of a note payable should be reported as
a. Deferred credit
b. Direct deduction from the face amount of the note
c. Deferred charge
d. Addition to the face amount of the note

21. Which statement is correct when an entity issued a note payable with no stated interest rate in exchange for
a depreciable asset?
a. The asset should be depreciated over the term of the note payable.
b. If fair value is unavailable, the note payable should be recorded at present value discounted at the
market rate of interest.
c. Both the note and the asset are recorded at the face amount of the note payable.
d. The note payable is recorded at face amount even if the fair value of the asset is readily available.

22. On January 1, 20x1, Unforgiven Co. purchased an inventory with a list price of ₱4,400,000 and a cash
selling price of ₱4,000,000 in exchange for a ₱4,800,000 noninterest-bearing note due on December 31,
20x3. The effective interest rate on the note is most approximately equal to
a. 5.2659%. b. 6.2695%. c. 8.7893%. d. 9.2625%.

23. On January 1, 20x1 WRECK RUIN Co. acquired land by issuing a three-year, 12%, ₱4,000,000 note
payable. Principal and all accrued interests are due on December 31, 20x3. How much is the interest
expense in 20x2?
a. 1,017,600 c. 537,600
b. 960,000 d. 764,213

24. On January 1, 20x1, SUNDER BREAK APART Co. obtained a ₱4,000,000, 180-day bank loan at an annual
rate of 10%. The loan agreement requires SUNDER to maintain a ₱400,000 compensating balance in its
bank account at the lending bank. SUNDER would otherwise maintain a balance of only ₱200,000 in this
account. The bank account earns interest at an annual rate of 2%. Based on a 360-day year, what is the
effective interest rate on the borrowing?
a. 5.21% c. 13.67%
b. 10.42% d. 12.33%
25. On January 1, 20x1, SEEMLY HANDSOME Co., issued a ₱12,000,000 non-interest bearing note that is
due in three annual installments as follows:
Date Amount
January 1, 20x4 ₱ 6,000,000
January 1, 20x5 4,000,000
January 1, 20x6 2,000,000
Total ₱12,000,000

The effective interest rate is 12%. How much is the carrying amount of the note on initial recognition?
a. 7,947,608 c. 7,958,340
b. 7,840,234 d. 7,712,349