Question

1. Assuming a 360-day year, when a $50,000, 90-day, 9% interest-bearing note payable matures, total payment will be

a) 51,125

b) 4,500

c) 54,500

d) 1,125

 

2. Chang Co. issued a $50,000, 120-day, discounted note to Guarantee Bank. The discount rate is 6%. Assuming a 360-day year, the cash proceeds to Chang Co. are

a) $49,000

b) $49,750

c) $51,000

d) $47,000

 

3. The journal entry used to record the issuance of an interest-bearing note for the purpose of borrowing funds for the business is

a) debit Accounts Payable; credit Notes Payable

b) debit Cash; credit Notes Payable

c) debit Notes Payable; credit Cash

d) debit Cash and Interest Expense; credit Notes Payable

Answer 1

Concepts and reason

Notes payable: Notes payable is an instrument issued for the amount borrowed. It is reported as a liability in the balance sheet. Notes payable has a fixed term and fixed rate of interest decided at the time of issue of the note.

Interest: Interest is the amount paid on the principal amount borrowed by issuing a note. Interest is calculated by multiplying fixed rate of interest decided at the time of issuance of notes payable with the amount borrowed. It is paid at the time of repayment of the note.

Discount on note: Discount is the excess of amount specified on the note and the cash received from the bank. A note is discounted with the bank with an intention to receive the cash immediately without waiting for the same till the end of the term of the note.

Fundamentals

Cash payment: Cash borrowed by issuing a note is repaid on maturity of the note. Cash payment includes amount borrowed and the interest at the end of the term of note. Interest is calculated at a fixed percent on the amount borrowed for the term of note.

1.

Calculate the total payment on maturity of the notes payable as shown below:

Thus, the total payment on maturity of the notes payable is.

2.

Calculate the cash proceeds to C Co. on discounting the note as shown below:

Thus, the cash proceeds to C Co. on discounting the note is.

3.

The journal entry that records the issuance of an interest-bearing note will include the debit to cash account and a credit to notes payable account.

Ans: Part 1

The total payment on maturity of the notes payable is $51,125.

Part 2

The cash proceeds to C Co. on discounting the note is $49,000.

Part 3

The journal entry that records the issuance of an interest-bearing note will include the debit cash; credit notes payable.