Question

1. On 11/01/2018 XYZ Inc. signed a 12% 90 days note borrowing $55K from its bank. Assuming 360 days in a year, XYZ's entry as of 11/30/2018 will be as follows:

A. Debit Interest Expense $550 and credit Interest Payable $550.

B. Debit Interest Expense $550 and credit Notes Payable $550.

C. Debit Discount on Notes Payable $1,100 and credit Interest Payable $1,100.

D. Debit Interest Expense $550 and credit Cash $550.

2. On 11/01/2018 Regal Co. borrowed $80,000 from its bank and signed a 12%, six-month note payable, all due at maturity. The interest on this loan is stated separately. How much interest expense will be recognized in 2019?

A. $2,400

B. $3,200

C. $4,800

D. $9,600

3. On December 1, Year 1, Bradley Corporation incurs a 15-year $200,000 mortgage liability in conjunction with the acquisition of an office building. This mortgage is payable in monthly installments of $2,400, which include interest computed at the rate of 12% per year. The first monthly payment is made on December 31, Year 1. Compute the total amount to be paid by Bradley over the 15-year life of the mortgage.

A. $200,000

B. $432,000

C. $474,000

D. $562,000

4. When a company sells bonds between interest dates they will pay which of the following at the first interest payment date?

A. An amount less than the stated interest rate times the principal.

B. An amount more than the stated interest rate times the principal.

C. An amount equal to the stated interest rate times the principal.

D. The company may skip the first interest payment date since the appropriate time has not passed.

5. Assets that have been pledged as security for a loan:

Select one:

a. Are reported as liabilities on the balance sheet.

b. Must be sold when the loan matures.

c. Become the property of the lender until the loan is paid in full.

d. Are disclosed in the notes to the financial statements.

Answer 1

• Answer 1

Entry on 30 Nov will be of Interest Expense due for 30 days.

Interest expense to be debited = 55000 x 12% x 30/360 = $ 550

Interest Payable will be credited because the interest is not yet paid.

Correct Answer = Option ‘A’ Debit Interest Expense $550 and credit Interest Payable $550

• Answer 2

Term of Note = 6 months = From 1 Nov 2018 to 30 April 2019

No. of months pertaining to 2019 = 4 months

Interest expense for 2019 = 80000 x 12% x 4/12 = $ 3200

Correct Answer = Option ‘B’ $ 3,200

• Answer 3

No. of months in 15 years = 12 x 15 = 180 months.

Monthly payments = $ 2400

Total payments in 15 years = 2400 x 180 = $ 432,000

Correct ANswer = Option ‘B’

• Answer 4

Correct Answer = Option ‘A’ An amount less than the stated interest rate times the principal.

This is because interest will be of lesser period of time.

• Answer 5

Correct Answer = Option ‘D’ Pledged Assets are DISCLOSED in the notes to the financial statements.