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Chapter 2
Notes Payable

NAME: Date:
Professor: Section: Score:

QUIZ:
1. On August 1, 20x1, an entity acquired a new equipment that it does not have to pay for until
September 1, 20x5. The total payment on September 1, 20x5, will include both principal and
interest. The initial measurement of the note and the equipment is
a. payment for the principal multiplied by Present value of ₱1
b. payment for interest multiplied by Present value of ordinary annuity of ₱1
c. a plus b
d. total payment on the note multiplied by Present value of ₱1

2. Which of the following represents a liability?

a. The obligation to pay interest on a five-year note payable that was issued the last day of the
current year.
b. The obligation to pay for goods that a company expects to order from suppliers next year.
c. The obligation to provide goods that customers have ordered and paid for during the
current year.
d. The obligation to distribute share of a company's own common stock next year as a result of
a stock dividend declared near the end of the current year.

3. Interest expenses are incurred

a. only on interest-bearing liabilities
b. only on liabilities which are discounted to their present values
c. only on liabilities which are initially and subsequently measured at amortized cost
d. only due to passage of time

4. When interest expense is calculated using the effective-interest amortization method, interest
expense (assuming that interest is paid annually) always equals the
a. actual amount of interest paid.
b. carrying amount of the note multiplied by the stated interest rate.
c. carrying amount of the note multiplied by the effective interest rate.
d. maturity value of the note multiplied by the effective interest rate.

5. Loan origination fees are

a. added to the carrying amount of the loan payable and subsequently amortized using the
straight-line method.
b. recognized immediately as income
c. added to the carrying amount of the loan payable and subsequently amortized using the
effective interest method.
d. deducted from the carrying amount of the loan payable and subsequently amortized using
the effective interest method.
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6. On March 1, 20X4, Fine Co. borrowed ₱10,000 and signed a two-year note bearing interest at 12%
per annum compounded annually. Interest is payable in full at maturity on February 28, 20X6.
What amount should Fine report as a liability for accrued interest at December 31, 20X5?
a. 0 b. 1,000 c. 1,200 d. 2,320

7. On December 30, 20X6, Bart, Inc., purchased a machine from Fell Corp. in exchange for a
noninterest bearing note requiring eight payments of ₱20,000. The first payment was made on
December 30, 20X6, and the others are due annually on December 30. At the date of issuance, the
prevailing rate of interest for this type of note was 11%. On Bart's December 31, 20X6, balance
sheet, the note payable to Fell was
a. 94,240 b. 102,920 c. 104,620 d. 114,240

The next two items are based on the following information:

House Publishers offered a contest in which the winner would receive ₱1,000,000, payable over 20
years. On December 31, 2000, House announced the winner of the contest and signed a note payable
to the winner for ₱1,000,000, payable in ₱50,000 installments every January 2. Also on December 31,
2000, House purchased an annuity for ₱418,250 to provide the ₱950,000 prize monies remaining after
the first ₱50,000 installment, which was paid on January 2, 2001.

8. In its December 31, 20x0, balance sheet, what amount should House report as note payable-
contest winner, net of current portion?
a. 368,250 b. 418,250 c. 900,000 d. 950,000

9. In its 20x0 income statement, what should House report as contest prize expense?
a. 0 b. 418,250 c. 468,250 d. 1,000,000

10. On December 1, 20x5, Money Co. gave Home Co. a ₱200,000, 11% loan. Money paid proceeds of
₱194,000 after the deduction of a ₱6,000 nonrefundable loan origination fee. Principal and
interest are due in 60 monthly installments of ₱4,310, beginning January 1, 20x6. The repayments
yield an effective interest rate of 11% at a present value of ₱200,000 and 12.4% at a present value
of ₱194,000. What amount of income from this loan should Money report in its 20x5 income
statement?
a. 0 b. 1,833 c. 2,005 d. 7,833

“He who obeys instructions guards his life, but he who is contemptuous of his ways will die.” (Proverbs 19:16)

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