1.

Notes may be issued

a. when assets are purchased
b. to creditors to temporarily satisfy an account payable created earlier
c. when borrowing money
d. for all of these

ANSWER: d

2. On July 8, Jones Inc. issued an $80,000, 6%, 120-day note payable to Miller Company.
Assume that the fiscal year of Jones ends July 31. Using the 360-day year, what is the amount
of interest expense recognized by Jones in the current fiscal year?
a. $700
b. $4,200
c. $307
d. $1,400
ANSWER: c

3. Martinez Co. borrowed $50,000 on March 1 of the current year by signing a 60-day, 9%, interest-
bearing note. Assuming a 360-day year, when the note is paid on April 30, the entry to record the
payment should include a
a. debit to Interest Payable for $750
b. debit to Interest Expense for $750
c. credit to Cash for $50,000
d. credit to Cash for $54,500

ANSWER: b

4. 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. $54,500
c. $1,125
d. $4,500
ANSWER: a

5. Assuming a 360-day year, proceeds of $48,750 were received from discounting a

$50,000, 90-day note at a bank. The discount rate used by the bank in computing the
proceeds was
a. 6.25%
b. 10.00%
c. 10.26%
d. 9.75%

ANSWER: b
6. Quick assets include
a. cash, cash equivalents, receivables, prepaid expenses, and inventory
 b. cash, cash equivalents, receivables, and prepaid expenses
c. cash, cash equivalents, receivables, and inventory
d. cash, cash equivalents, and receivables

ANSWER: d
7. A borrower has two alternatives for a loan: (a) issue a $480,000, 60-day, 8% note or (2) issue
a $480,000, 60-day note that the creditor discounts at 8%. (Assume a 360-day year is used for
interest calculations.)

(a) Calculate the amount of the interest expense for each option.
(b) Determine the proceeds received by the borrower in each situation.
(c) Journalize the entry for the issuance and maturity of both the options.

ANSWER:
(a) $480,000 8% 60/360 = $6,400 for each alternative.
(b)(1)$480,000 simple-interest note: $480,000 proceeds
(2)$480,000 discounted note: $480,000 $6,400 interest = $473,600
proceeds
c. (a) issuance: Cash 480,000
Notes Payable 480,000
Maturirty:
Notes Payable 480,000
Interest Expense 6,400
Cash 486,400

(b) issuance: Cash 473,600

Interest Expense 6,400
Notes Payable 480,000

Maturity: Notes Payable 480,000

Cash 480,000