Question 1

Prepare journal entries for the following transactions for Design Imports.
a) Purchased $7,800 of merchandise (perpetual inventory method) from Serial Material Company on account.
b) Gave Serial Material Company a 120-day, 5% note in settlement of the account payable.
c) Design Imports defaulted on its note on the maturity date.
d) Design Imports paid the previously defaulted note plus $115 additional interest.

Accepted Answer

The answer of Prepare journal entries for the following transactions...

Question 2

The discount period on a discounted note is:

Accepted Answer

The discount period on a discounted note refers to the time between the discount date and the maturity date. This is the period during which the note holder agrees to receive less than the face value of the note in exchange for early payment.

Question 3

Canton Graphics issues a $13,000, 7.5%, 2-year note to Bowden Corporation. Interest on the note is _________ and the maturity value is __________.

Accepted Answer

Interest on the note is calculated as Principal amount * Interest rate * Time = $13,000 * 7.5% * 2 = $1,950. The maturity value is the sum of the principal amount and the interest, which is $13,000 + $1,950 = $14,950.

Question 4

Prepare journal entries for the following transactions for Mission Company:
June 1 Purchased equipment from Carry, Inc. for $9,400, giving a 3-month, 10% note
Sept. 1 Paid amount due on note

Accepted Answer

The answer of Prepare journal entries for the following transactions...

Question 5

The maturity value for a $10,000, 72-day note at 7% interest is $10,140.

Accepted Answer

The maturity value is calculated as the principal amount plus the interest earned. The interest earned is calculated as the principal amount multiplied by the interest rate multiplied by the time period. In this case, the interest earned is $10,000 x 0.07 x 72/360 = $140. Therefore, the maturity value is $10,000 + $140 = $10,140.

Question 6

Ross, immediately after receiving a note from a customer, discounted it at the bank and received the proceeds. Ross's entry on his books would include a:

Accepted Answer

When Ross discounts a note at the bank, he receives cash and removes the note from his books, which requires a credit to Notes Receivable.

Question 7

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

Accepted Answer

Contingent liability is the correct term because it refers to a potential financial obligation that may arise in the future, depending on the occurrence of a certain event. In the context of discounting a note receivable, if the maker of the note fails to pay, the endorser (the business) becomes liable to the bank, making it a contingent liability.

Question 8

Melon Industries issues a $20,000, 10%, 135-day note to Apple Communications. Interest on the note is _________ and the maturity value is __________. (Use a 360-day year. Do not round any intermediate calculations. Round your final answers to the nearest dollar.)

Accepted Answer

Interest = Principal × Rate × Time = $20,000 × 10% × (135/360) = $750. Maturity value = Principal + Interest = $20,000 + $750 = $20,750.

Question 9

A $4,800, 10% note dated June 2 for 90 days was discounted on August 19 at 13%. The number of days in the discount period is 15 days.

Accepted Answer

The discount period is the time between the discount date (August 19) and the maturity date of the note. Since the note is for 90 days starting from June 2, it matures on August 31. Therefore, the discount period is from August 19 to August 31, which is 13 days, not 15.

Question 10

Bill's Bikes discounts a customer's 90-day, 8%, $3,000 note at a bank at 12%. The discount period is 45 days. It records the proceeds as: (Use a 360-day year. Do not round any intermediate calculations. Round your final answers to the nearest dollar.)

Accepted Answer

The answer of Bill's Bikes discounts a customer's 90-day, 8%,...

Question 11

The maturity value of a $14,000, 6%, 9-month note is:

Accepted Answer

The maturity value of a note includes both the principal amount and the interest earned. The interest can be calculated as Principal × Rate × Time = $14,000 × 6% × (9/12) = $630. Therefore, the maturity value is the principal plus interest, which is $14,000 + $630 = $14,630.

Question 12

Marble Company discounts a customer's 8%, $4,000, 90-day note dated April 1, on May 15. The discount period is 45 days, and the bank discount rate is 15%. The maturity value of the note is $4,080. The bank discount is: (Use a 360-day year. Do not round any intermediate calculations. Round your final answer to the nearest dollar.)

Accepted Answer

The bank discount is calculated as follows:Bank discount = Face value of note × Discount rate × Discount period / 360 daysBank discount = $4,000 × 15% × 45 days / 360 days= $4,000 × 0.15 × 45 / 360= $4,000 × 0.075= $300The maturity value of the note is $4,080, which means that the bank discount is $4,080 - $4,000 = $80.

Question 13

The amount the bank charges when it discounts a note is calculated as:

Accepted Answer

The answer of The amount the bank charges when it...

Question 14

The proceeds from discounting a note receivable are the:

Accepted Answer

The proceeds from discounting a note receivable are calculated by subtracting the bank discount from the maturity value of the note. This gives the amount the holder receives from the bank when the note is discounted before its maturity.

Question 15

A $2,800, 10% note dated March 12 for 80 days was discounted on May 2 at 12%. The number of days in the discount period (using a 365-day year) is:

Accepted Answer

The answer of A $2,800, 10% note dated March 12...

Question 16

A $5,600, 8% note dated May 20 for 78 days was discounted on June 23 at 14%. The amount of the discount (using a 360-day year) is: (Do not round any intermediate calculations. Round your final answer to the nearest cent.)

Accepted Answer

The answer of A $5,600, 8% note dated May 20...

Question 17

Canton Graphics issues a $22,000, 10%, 8-month note to Bowden Corporation. Interest on the note is _________ and the maturity value is __________. (Do not round any intermediate calculations. Round your final answers to the nearest dollar.)

Accepted Answer

The interest on the note is calculated as Principal x Rate x Time = $22,000 x 10% x (8/12) = $1,467. The maturity value is the sum of the principal and the interest, which is $22,000 + $1,467 = $23,467.

Question 18

Prepare the journal entries for the following transactions for Dobson Industries Company.
a) Dobson sold $8,000 of merchandise to Bolt Imports Company on account. The company uses the periodic inventory method.
b) Dobson accepted a 90-day, 7% note from Bolt in settlement of its account.
c) Bolt defaulted on its note on the maturity date.
d) Collected the previously defaulted Bolt note plus $25 additional interest.

Accepted Answer

The answer of Prepare the journal entries for the following...

Question 19

The process of endorsing a note and transferring it to a financial institution is known as:

Accepted Answer

Discounting a note receivable involves endorsing and transferring the note to a financial institution before its maturity date, usually for less than its face value, to obtain cash immediately.

Question 20

Mountain Site discounts a customer's 10%, $2,000, 90-day note dated April 1, on May 15. The discount period is 45 days, and the bank discount rate is 16%. The maturity value of the note is $2,050. The bank discount is $41. The proceeds of the note are:

Accepted Answer

The proceeds of the note are calculated by subtracting the bank discount from the maturity value of the note. Given the bank discount is $41 and the maturity value is $2,050, the proceeds are $2,050 - $41 = $2,009.

Quiz 14: Notes Receivable and Notes Payable