IA2 QUIZ - NOTES AND BONDS PAYABLE

1. If the cash paid on the purchase of bonds or if the cash proceeds received from the
issuance of bonds is less than the face amount of the bonds, there is
a) Bonds
b) Discount
c) Premiums
d) Payables

2. Which of the following statements about noninterest-bearing notes is false?

a) The face amount of a noninterest-bearing note may include both the principal and
interest as a single amount to be paid back at maturity date.
b) Noninterest bearing is not a descriptive designation for this type of note because such
notes do bear interest.
c) The effective rate on a short-term noninterest-bearing note, with a specified term,
cannot be determined unless it is given on the face of the note.
d) The principal amount of a noninterest-bearing note is its future cash flows discounted at
its effective interest rate.

3. A short-term note payable may include all of the following except:

a) unearned revenue.
b) trade notes payable.
c) nontrade notes payable.
d) a current maturity of a long-term liability.

4. Which of the following does not properly describe effective interest rate?
a) yield rate
b) imputed rate of interest
c) current market rate
d) stated rate

5. Straight-line amortization of bond premium or discount:

a) provides the same amounts of interest expense and interest revenue each interest
period as the effective interest method.
b) is appropriate when the bond term is especially long.
c) provides the same total amount of interest expense and interest revenue as the
effective interest method over the life of the bonds.
d) is appropriate for deep discount bonds.

6. STUNTED Co. issued a 3-year, noninterest-bearing note of ₱4,000,000 to DWARFISH,

Inc., a related party. The proceeds from the issuance of the note were ₱2,847,120. The
note matures on December 31, 20x3. The prevailing interest for similar type of
obligation is 12%. The entry on initial recognition of the note includes a
a) debit to notes payable for ₱2,847,120.
b) credit to discount on notes payable for ₱1,152,880.
c) credit to notes payable for ₱2,847,120.
d) debit to discount on notes payable for ₱1,152,880.

7. Interest expenses are incurred

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

8. Which of the following is not true about the discount on short-term notes payable?
a) The carrying amount of a noninterest-bearing note payable due in lump sum will
decrease as time goes by.
b) The principal amount of a debt is the cash or cash equivalent amount borrowed.
c) When a noncash asset is acquired and the stated rate of interest is different from the
current market rate of interest, the cost of the asset is the present value of the future
cash payments discounted at the current market rate of interest rather than at the
stated interest rate.
d) A company that receives cash in an amount less than the face amount of a noninterest-
bearing note payable should record the note at its discounted present value.

9. On January 1, 20x1, Line Co. obtains a ₱4,000,000 bank loan due on December 31, 20x4.
Interest of 12% is due annually. The bank charges Line Co. an 11.19% nonrefundable
loan origination fee. The carrying amount of loan on December 31, 20x1 is most
approximately equal to
a) 3,302,895
b) 3,640,784
c) 3,436,792
d) 3,579,235

10. On January 1, 20x1, SCRUPULOUS EXACT Co., acquired a piece of equipment by issuing a
₱12,000,000, non-interest-bearing note that is payable in three equal annual
installments starting January 1, 20x4. The current market rate of interest on January 1,
20x1 is 12%. How much is the carrying amount of the note on initial recognition?
a) 7,124,844
b) 7,658,901
c) 7,740,084
d) 7,412,769

11. An entity purchased bonds to be measured at amortized cost. The bonds were
purchased at a premium. Assume the fair value of the bonds is volatile. Therefore:
a) the ending valuation allowance account balance will depend on ending market value
and original cost.
b) the ending valuation allowance account balance will depend on the ending market value
and original cost adjusted for amortization of premium.
c) less cash interest is received each year than interest revenue is recognized.
d) the carrying amount of the bonds decreases over the term of the bonds

12. On January 1, 20x1, VELVETY SMOOTH Co. acquired an intangible asset by paying cash
of ₱400,000 and issuing a noninterest-bearing note payable of ₱4,000,000 due in 4
equal annual installments. The first installment is due on January 1, 20x1. The prevailing
rate of interest for this type of note is 12%. How much is the interest expense in 20x1?
a) 0
b) 288,220
c) 432,000
d) 334,357

13. Which of the following statements is true?

a) The market rate of interest is the interest rate used to determine the amount of cash
interest that will be paid on the principal.
b) A debtor’s December 31, 20x1 statement of financial position is to be published on
March 31, 20x2. An obligation due December 31, 20x6 has a due date which can be
 accelerated by the creditor to the present date if the current ratio falls below 2:1. The
current ratio on December 31, 20x1 is 2.2:1. The obligation is a current liability.
c) A debtor’s December 31, 20x1 statement of financial position is to be published on
March 31, 20x2. An obligation with a due date of December 31, 20x6 is also due on
demand by the creditor. At December 31, 20x1, there is no indication that the creditor
intends to call in the debt. The obligation is a current liability.
d) A noninterest-bearing note sometimes is called a discounted note because the cash
received is more than the face amount of the note.

14. On January 1, 20x1, SUBDUE Co. borrowed 10%, ₱4,000,000 loan from CONQUER Bank.
Principal is due on January 1, 20x4 but interests are due annually starting January 1,
20x2. SUBDUE was charged by the bank a 3% nonrefundable loan origination fee
representing service fee. How much is the carrying amount of the note on initial
recognition?
a) 3,880,000
b) 3,947,608
c) 3,720,00
d) 3,840,234

15. On November 1, 20x1, a company purchased a new machine that it does not have to
pay for until November 1, 20x3. The total payment on November 1, 20x3, will include
both principal and interest. Assuming interest at a 10% rate, the cost of the machine
would be the total payment multiplied by what time value of money concept?
a) FV of annuity of ₱1.
b) PV of ₱1.
c) FV of ₱1.
d) PV of annuity of ₱1

16. Use of the effective-interest method in amortizing bond premiums and discounts results
in
a) a greater amount of interest expense over the life of the bond issue than would result
from use of the straight-line method.
b) a varying amount being recorded as interest expense from period to period.
c) a variable rate of return on the book value of the investment.
d) a smaller amount of interest expense over the life of the bond issue than would result
from use of the straight-line method.

17. Interest payment dates of a bond issue are March 1 and September 1, 20x1. The bond
was issued on June 1, 20x1. Interest expense for the year ended December 31, 20x1
would be for:
a) seven (7) months
b) six (6) months
c) ten (10) months
d) four (4) months

18. On January 1, 20x1, SAVOR TASTE Co. acquired a machine by issuing a 3-year, 3%,
₱4,000,000 note payable. Principal is due on January 1, 20x4 but interests are to be paid
annually. The prevailing interest rate for this type of note is 12%. How much is the
carrying amount of the note on initial recognition?
a) 3,174,309
b) 4,000,000
c) 3,135,340
d) 3,247,120

19. On January 1, 20x1, SUNDER BREAK APART Co. obtained a ₱4,000,000, 180-day bank
loan at an annual rate of 10%. The loan agreement requires SUNDER to maintain a
₱400,000 compensating balance in its bank account at the lending bank. SUNDER would
otherwise maintain a balance of only ₱200,000 in this account. The bank account earns
interest at an annual rate of 2%. Based on a 360-day year, what is the effective interest
rate on the borrowing?
a) 13.67%
b) 12.33%
c) 10.42%
d) 5.21%

20. On January 1, 20x1, SAUCY BOLD Co. acquired a machine by issuing a 3-year, 3%,
₱4,800,000 note payable. Principal and interests are due in three equal annual
installments starting December 31, 20x1. The prevailing interest rate for this type of
note is 12%. How much is the carrying amount of the note on initial recognition?
a) 4,800,000
b) 4,082,198
c) 4,104,313
d) 4,014,534