Question 1

When a buyer receives a time extension by giving the seller a note, Accounts Payable is debited for the buyer.

Accepted Answer

When a buyer receives a time extension by giving the seller a note, Accounts Payable is credited for the buyer.

Question 2

Brooke Company grants James Decorating additional time to pay its past due account. James makes a written promise to pay Brooke the amount on a certain date. Brooke Company records this transaction as follows:
A) debit Notes Receivable; credit Accounts Receivable.
B) debit Cash; credit Accounts Receivable.
C) debit Accounts Receivable; credit Notes Receivable.
D) debit Accounts Payable; credit Notes Payable.

Accepted Answer

When a company converts an account receivable into a note receivable, it debits Notes Receivable (indicating it now has a formalized promise of payment) and credits Accounts Receivable (indicating the reduction in the open account balance).

Question 3

Describe (a) the function of a promissory note and (b) explain its various parts and features.

Accepted Answer

The answer of Describe (a) the function of a promissory...

Question 4

________ is a current liability and ________ is a current asset on the balance sheet.
A) Accounts Payable; Notes Payable
B) Accounts Receivable; Notes Receivable
C) Notes Payable; Notes Receivable
D) Notes Receivable; Notes Payable

Accepted Answer

Notes Payable is a current liability because it represents a short-term obligation to pay a debt. Notes Receivable is a current asset because it represents a short-term amount owed to the company that is expected to be received in cash.

Question 5

A buyer pays a note in full on its maturity date. The buyer would record a:
A) debit to Cash; credit to Interest Income; credit to Notes Receivable.
B) debit to Interest Expense; credit to Cash; credit to Notes Payable.
C) debit to Notes Receivable; credit to Cash; credit to Interest Income.
D) debit to Interest Expense; debit to Notes Payable; credit to Cash.

Accepted Answer

When a buyer pays a note in full on its maturity date, they are settling the principal amount of the note (Notes Payable) and paying the interest accrued on that note (Interest Expense). Both of these amounts are debited to reflect a decrease in liability (Notes Payable) and an expense (Interest Expense), respectively. Cash is credited to reflect the outflow of cash to settle the note and interest.

Question 6

Prepare the journal entries for Shirts Plus for the following transactions:
a) Shirts Plus sold $8,100 of merchandise to Beck Company on account. The cost of the sale to Shirts Plus is $4,500. The company uses the periodic method.
b) Shirts Plus received a 60-day, $8,100, 9% note for a time extension of past-due account of Beck Company.
c) Collected Beck Company's note on the maturity date.

Accepted Answer

The answer of Prepare the journal entries for Shirts Plus...

Question 7

A note renewed at maturity would have the following effects for a buyer:
A) debit to Notes Payable (new); debit to Notes Payable (old); credit to Cash; credit to Interest Expense.
B) debit to Notes Payable (old); debit to Cash; credit to Notes Payable (new); credit to Interest Expense.
C) debit to Notes Payable (old); credit to Notes Payable (new); credit to Cash; credit to Interest Expense.
D) debit to Notes Payable (old); debit to Interest Expense; credit to Cash; credit to Notes Payable (new).

Accepted Answer

When a note is renewed, the old note payable is debited (removed), interest expense is debited (for the interest on the note), cash is credited if any payment is made, and the new note payable is credited (added).

Question 8

Additional time given to the payee to settle an account with issuance of a note, results in a transfer of:
A) assets from Notes Receivable to Accounts Receivable.
B) assets from Accounts Receivable to Notes Receivable.
C) liabilities from Notes Payable to Accounts Payable.
D) liabilities from Accounts Payable to Notes Payable.

Accepted Answer

When a payee is given additional time to settle an account and a note is issued, the company's asset account transitions from Accounts Receivable (an amount expected to be received) to Notes Receivable (a formal agreement to receive a specific amount by a certain date). This reflects a more formalized promise to pay.

Question 9

Straight Company sold merchandise to Cross Company and received a promissory note from Cross. Straight should record the transaction as:
A) debit Notes Receivable and credit Sales for the principal amount of the note.
B) debit Notes Receivable and credit Sales for the maturity value of the note.
C) debit Accounts Receivable and credit Sales for the maturity amount of the note.
D) debit Accounts Receivable and credit Sales for the principal amount of the note.

Accepted Answer

When a company sells merchandise and receives a promissory note in exchange, it should record the transaction by debiting Notes Receivable and crediting Sales for the principal amount of the note. This reflects the receivable amount due from the sale.

Question 10

Tricia's Decor purchased merchandise from House Beautiful and issued a promissory note. Tricia should record the transaction as:
A) debit Purchases and credit Notes Payable for the principal amount of the note.
B) debit Purchases and credit Notes Payable for the maturity value of the note.
C) debit Purchases and credit Accounts Payable for the face amount of the note.
D) debit Purchases and credit Accounts Payable for the maturity value of the note.

Accepted Answer

When a company issues a promissory note for merchandise, it should debit Purchases for the principal amount of the note and credit Notes Payable for the same amount, reflecting the obligation to pay.

Question 11

A note renewed at maturity would have the following effects for a seller:
A) debit to Notes Receivable (new); debit to Notes Receivable (old); credit to Cash; credit to Interest Income.
B) debit to Notes Receivable (old); debit to Cash; debit to Notes Receivable (new); credit to Interest Income.
C) debit to Notes Receivable (new); debit to Cash; credit to Notes Receivable (old); credit to Interest Income.
D) debit to Notes Receivable (old); debit to Interest Income; credit to Notes Receivable (new); credit to Cash.

Accepted Answer

When a note is renewed, the old note is settled, and a new note is issued. This involves debiting the new Notes Receivable, crediting the old Notes Receivable, and recognizing any interest income. Cash is not involved in the renewal process.

Question 12

If a buyer pays off an interest-bearing note at maturity, Interest Income would increase for the buyer.

Accepted Answer

Interest Income is earned by the lender, not the buyer. When a buyer pays off an interest-bearing note at maturity, it means they are repaying the principal and interest owed to the lender. The buyer does not earn Interest Income from this transaction; instead, the lender does.

Question 13

To obtain an extension of time for the payment of an account, a customer may issue a note for any portion of the amount due.

Accepted Answer

Issuing a note for a portion of the amount due is a common practice for obtaining an extension of time for payment, as it formalizes the agreement between the customer and the creditor regarding the deferred payment.

Question 14

Jeff Company issues a promissory note to David Company to get extended time on an account payable. Jeff Company records this transaction as follows:
A) debit Accounts Receivable; credit Notes Receivable.
B) debit Notes Receivable; credit Accounts Receivable.
C) debit Notes Payable; credit Accounts Payable.
D) debit Accounts Payable; credit Notes Payable.

Accepted Answer

Jeff Company is converting an account payable into a note payable, so they debit Accounts Payable to decrease it and credit Notes Payable to record the new obligation.

Question 15

Failure of maker to pay the maturity value of a note when due is considered a(n):
A) honored note.
B) equipment exchange.
C) default.
D) None of the above.

Accepted Answer

When a maker fails to pay the maturity value of a note when due, it is considered a default. This means the maker has not fulfilled their obligation to pay the note at its maturity.

Question 16

When an account receivable is exchanged for a note receivable, a shift in liability occurs.

Accepted Answer

When an account receivable is exchanged for a note receivable, there is no shift in liability; instead, there is a change in the form of the asset held by the company.

Question 17

A seller may accept a note from a buyer as a result of an exchange for an equipment purchase.

Accepted Answer

A seller can accept a note (promissory note) from a buyer as part of the payment terms for an equipment purchase, which outlines the buyer's promise to pay the agreed-upon amount over a specified period.

Question 18

On April 3, Angel Express issued a 12%, 90-day, $14,000 promissory note. Angel Express should record the payment of the note on the maturity day as: (Use a 360-day year. Do not round any intermediate calculations. Round your final answers to the nearest dollar.)
A) debit Notes Payable $14,420; credit Cash $14,420.
B) debit Notes Payable $14,000; debit Interest Expense $420; credit Cash $14,420.
C) debit Notes Payable $14,000; debit Interest Payable $420; credit Cash $14,420.
D) debit Notes Payable $14,000; credit Cash $14,000.

Accepted Answer

The correct answer is B because the interest on the note is calculated as follows: $14,000 * 12% * (90/360) = $420. Therefore, the total payment is the principal ($14,000) plus the interest ($420), which equals $14,420. This is recorded by debiting Notes Payable for the principal amount, debiting Interest Expense for the interest, and crediting Cash for the total payment.

Question 19

Martin Company needs additional time to pay its accounts payable to Boster Company. Martin makes a written promise to pay Boster the amount on a certain date. Martin records this transaction as follows:
A) debit Notes Payable; credit Accounts Payable.
B) debit Cash; credit Accounts Payable.
C) debit Accounts Payable; credit Notes Payable.
D) debit Notes Payable; credit Cash.

Accepted Answer

When Martin Company converts its accounts payable to a note payable, it is essentially replacing the obligation to pay the amount due to Boster Company with a formal written promise to pay on a specific date. This transaction is recorded by debiting (decreasing) Accounts Payable, as the liability under accounts payable is being eliminated, and crediting (increasing) Notes Payable, as a new liability under a note payable is being created.

Question 20

Barrel Enterprises was unable to collect a $1,900 note receivable plus $80 interest on the maturity date, but hoped to collect the amount in the future. Barrel Enterprises should record this event on the maturity date as:
A) debit Bad Debts Expense $1,900; credit Notes Receivable $1,900.
B) debit Allowance for Doubtful Accounts $1,980; credit Notes Receivable $1,980.
C) debit Accounts Receivable $1,900; debit Interest Income $80; credit Cash $1,980.
D) debit Accounts Receivable $1,980; credit Interest Income $80; credit Notes Receivable $1,900.

Accepted Answer

Barrel Enterprises should record the total amount due as Accounts Receivable, which includes both the principal and interest, and remove the note from Notes Receivable while recognizing the interest income.

Quiz 14: Notes Receivable and Notes Payable

When a buyer receives a time extension by giving the seller a note, Accounts Payable is debited for the buyer.

Brooke Company grants James Decorating additional time to pay its past due account. James makes a written promise to pay Brooke the amount on a certain date. Brooke Company records this transaction as follows:

Describe (a) the function of a promissory note and (b) explain its various parts and features.

is a current liability and is a current asset on the balance sheet.

A buyer pays a note in full on its maturity date. The buyer would record a:

A note renewed at maturity would have the following effects for a buyer:

Additional time given to the payee to settle an account with issuance of a note, results in a transfer of:

Straight Company sold merchandise to Cross Company and received a promissory note from Cross. Straight should record the transaction as:

Tricia's Decor purchased merchandise from House Beautiful and issued a promissory note. Tricia should record the transaction as:

A note renewed at maturity would have the following effects for a seller:

If a buyer pays off an interest-bearing note at maturity, Interest Income would increase for the buyer.

To obtain an extension of time for the payment of an account, a customer may issue a note for any portion of the amount due.

Jeff Company issues a promissory note to David Company to get extended time on an account payable. Jeff Company records this transaction as follows:

Failure of maker to pay the maturity value of a note when due is considered a(n) :

When an account receivable is exchanged for a note receivable, a shift in liability occurs.

A seller may accept a note from a buyer as a result of an exchange for an equipment purchase.

On April 3, Angel Express issued a 12%, 90-day, $14,000 promissory note. Angel Express should record the payment of the note on the maturity day as: (Use a 360-day year. Do not round any intermediate calculations. Round your final answers to the nearest dollar.)

Martin Company needs additional time to pay its accounts payable to Boster Company. Martin makes a written promise to pay Boster the amount on a certain date. Martin records this transaction as follows:

Barrel Enterprises was unable to collect a $1,900 note receivable plus $80 interest on the maturity date, but hoped to collect the amount in the future. Barrel Enterprises should record this event on the maturity date as: