Notes Receivable Test Bank PDF

Junior Philippine Institute of Accountants
University of Cebu – Banilad Chapter
NOTES RECEIVABLE TEST BANK
MULTIPLE CHOICE
1. The basic issues in accounting for notes receivable include each of the following except
a. analyzing notes receivable.

b. disposing of notes receivable.
c. recognizing notes receivable.
d. valuing notes receivable.
2. A 60-day note receivable dated June 13 has a maturity date of
a. August 13.
b. August 12.
c. August 11.
d. August 10.
3. The maturity value of a $90,000, 10%, 60-day note receivable dated July 3 is
a. $90,000.
b. $99,000.
c. $105,000.
d. $91,500.
4. A 90-day note dated June 14 has a maturity date of
a. September 14.
b. September 12.
c. September 13.
d. September 15.
5. A promissory note
a. is not a formal credit instrument.

b. may be used to settle an accounts receivable.
c. has the party to whom the money is due as the maker.
d. cannot be factored to another party.
6. Which of the following is not true regarding a promissory note?
a. Promissory notes may not be transferred to another party by endorsement.

b. Promissory notes may be sold to another party.
c. Promissory notes give a stronger legal claim to the holder than accounts receivable.
d. Promissory notes may be bearer notes and not specifically identify the payee by
name.
7. The maturity value of a $4,000, 9%, 60-day note receivable dated February 10th is
a. $4,060.
b. $4,030.
c. $4,000.
c. $4,360.
8. The interest on a $5,000, 10%, 1-year note receivable is
a. $5,000.
b. $500.
c. $5,050.
d. $5,500.
9. The maturity value of a $30,000, 8%, 3-month note receivable is
a. $30,600.
b. $30,240.
c. $32,400.
d. $30,200.
10. Risen Company receives a $5,000, 3-month, 8% promissory note from Dodd
Company in settlement of an open accounts receivable. What entry will Risen Company
make upon receiving the note?
a. Notes Receivable 5,100

Accounts Receivable—Dodd Company 5,100
b. Notes Receivable 5,100
Interest Revenue 100
c. Notes Receivable 5,000
Interest Receivable 100
d. Notes Receivable 5,000
11. A company that receives an interest-bearing note receivable will
a. debit Notes Receivable for the maturity value of the note.

b. credit Notes Receivable for the maturity value of the note.
c. debit Notes Receivable for the face value of the note.
d. credit Notes Receivable for the face value of the note.
12. Short-term notes receivable is reported at
a. cash (net) realizable value.

b. face value.
c. gross realizable value.
d. maturity value.
13. When a note receivable is dishonored,
a. interest revenue is never recorded.

b. bad debts expense is recorded.
c. the maturity value of the note is written off.
d. Accounts Receivable is debited if eventual collection is expected.
14. The average collection period is computed by dividing
a. net credit sales by average gross accounts receivable.

b. net credit sales by ending gross accounts receivable.
c. the accounts receivable turnover ratio by 365 days.
d. 365 days by the accounts receivable turnover ratio.
15. Herbert Company lends Newton Company $30,000 on April 1, accepting a four-
month, 9% interest note. Herbert Company prepares financial statements on April 30.
What adjusting entry should be made before the financial statements can be prepared?
a. Note Receivable 30,000

Cash 30,000
b. Interest Receivable 225
c. Cash 225
d. Interest Receivable 900
16. When a note is accepted to settle an open account, Notes Receivable is debited for
the note's
a. net realizable value.

b. maturity value.
c. face value.
d. face value plus interest.
17. A note receivable is a negotiable instrument which
a. eliminates the need for a bad debts allowance.

b. can be transferred to another party by endorsement.
c. takes the place of checks in a business firm.
d. can only be collected by a bank.
18. The interest on a $2,000, 6%, 90-day note receivable is
a. $120.
b. $60
c. $30.
d. $90.
19. Notes receivable are recognized in the accounts at
a. cash (net) realizable value.

b. face value.
c. gross realizable value.
d. maturity value.
20. The retailer considers VISA and MasterCard sales as
a. cash sales.
b. promissory sales.
c. credit sales.
d. contingent sales.
PROBLEM SOLVING
Problem 1
Rockwell Company reported the following receivables on December 31, 2018:
Accounts Receivable, net of P520,000 allowance 3,840,000
for doubtful accounts
Interest Receivable 190,000
Notes Receivable 4,000,000
*The notes receivable comprised:
▪ P1,000,000 note dated October 31, 2018, with principal and interest payable on
October 31, 2019.
▪ P3,000,000 noted dated March 31, 2018, with principal and 8% interest payable on
March 31, 2019.
*During 2019, sales revenue totaled P21,200,000, P19,800,000 cash was collected from
customers, and P410,000 in accounts receivable were written off. All sales are made on a
credit basis.
*Doubtful accounts expense is recorded at year-end by adjusting the allowance account
to an amount equal to 10% of year-end accounts receivable.
1. What amount should be reported as interest income for 2019?
2. What amount should be reported as doubtful accounts expense for 2019?
Problem 2
On January 1, 2018, Gomez de Liano Company sold goods to Dela Cruz company. Dela
Cruz signed a noninterest-bearing note requiring payment of P600,000 annually for
seven years. The first payment was made on January 1, 2018.
The prevailing rate of interest for this type of note at date of issuance was 10%.
1. What amount should be recorded as sales revenue in January 2018?
2. What is carrying amount of the note receivable on January 1, 2018?
3. What is the interest income for 2018?
4. What is the carrying amount of the note receivable on December 31, 2018?
Problem 3
On December 31, 2018, Villamontes Company sold a machine in the ordinary course of
business to Noviemendo Company in exchange for a noninterest bearing note requiring
ten annual payments of P1,000,000.
The entity made the first payment on December 31, 2018. The market interest rate for
similar notes at date of issuance was 8%.
1. What is the amount of sales revenue?
2. On December 31, 2018, what is the carrying amount of the note receivable?
3. What is the interest income for 2019?
What is the carrying amount of the note receivable on December 31, 2019?
ANSWERS:
MULTIPLE CHOICE
1. A 6. A 11. C 16. C
2. B 7. A 12. A 17. B
3. D 8. B 13. D 18. C
4. B 9. A 14. D 19. B
5. B 10. D 15. B 20. A
Problem 1
1. 110,000
P3M x 8% x 3/12 (January 1 to March 31, 2019) 60,000
P1M x 6% x 10/12 (January 1 to October 31, 2019) 50,000
Total Interest Revenue 110,000
2. 425,000
Accounts Receivable Dec. 31, 2018 (3,840,000 + 520,000) 4,360,000
Credit sales 21,200,000
Cash collections (19,800,000)
Write-off (410,000)
Accounts receivable- Dec. 31, 2019 5,350,000
Allowance- Dec. 31, 2018 520,000

Doubtful account expense (SQUEEZE) 425,000
Total 945,000
Write-off (410,000)
Allowance- Dec. 31, 2019 (10% x 5,350,000) 535,000
Problem 2
1. 3,216,000
First payment on January 1, 2018 600,000
Present value of remaining six payments (600,000 x 4.36) 2,616,000
Correct sales revenue 3,216,000
Note receivable (600,000 x 6) 3,600,00
Present value of six payments (2,616,000)
Unearned interest income- January 1, 2018 984,000
2. 2,616,000 – Present value of remaining six payments
3. 261,600 – Interest income for 2018 (10% x 2,616,000)
4. 2,877,600
Note receivable- December 31, 2018 3,600,000
Unearned interest income- December 31, 2018
(984,000-261,600)
(722,400)
Carrying amount- December 31, 2018 2,877,600
Problem 3
1. 7,250,000
First payment on December 31, 2018 1,000,000
Present value of remaining nine payments (1M x 6.25) 6,250,000
Total sales revenue 7,250,000
2. 6,250,000 - Present value of remaining nine payments
3. 500,000 – Interest income for 2019 (8% x 6,250,000)
4. 5,750,000
Collection on December 31, 2019 (1,000,000)
Unearned interest income- December 31, 2109
(2,750,000-500,000) (2,250,000)
Carrying amount- December 31, 2019 5,750,000

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What are the basic issues in accounting for notes receivable?

What are the basic issues in accounting for notes receivable?

What are the key components of a promissory note?

What are the key components of a promissory note?

Junior Philippine Institute of Accountants

University of Cebu – Banilad Chapter

NOTES RECEIVABLE TEST BANK

a. analyzing notes receivable.

4. A 90-day note dated June 14 has a maturity date of

a. is not a formal credit instrument.

a. Promissory notes may not be transferred to another party by endorsement.

8. The interest on a $5,000, 10%, 1-year note receivable is

9. The maturity value of a $30,000, 8%, 3-month note receivable is

a. Notes Receivable 5,100

a. debit Notes Receivable for the maturity value of the note.

a. cash (net) realizable value.

a. interest revenue is never recorded.

a. net credit sales by average gross accounts receivable.

a. Note Receivable 30,000

a. net realizable value.

a. eliminates the need for a bad debts allowance.

19. Notes receivable are recognized in the accounts at

a. cash (net) realizable value.

Allowance- Dec. 31, 2018 520,000

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