Note Discounting Uploaded

1. Wayne Company provided the following transactions:

January 1 The entity sold merchandise for 500,000 accepting a note of 500,000 for six
months with interest to be paid at maturity at 12%.
March 1 The entity discounted the note without recourse at the local bank at 15%.
July 1 The customer paid the bank in full.

The entry on July 1 would involve a:

a. Debit to interest expense of 6,500
b. Credit to Note receivable discounted of 500,000
c. Credit to interest income of 30,000
d. Credit to Note receivable of 500,000
2. On August 31, 2015, Staff Company discounted with recourse a customer’s note at the bank
at discount rate of 15%.

The note was received from the customer on August 1, 2015, is for 90 days, has a face value of
5,000,000, and carries an interest rate of 12%. The customer paid the note to the bank on
October 30, 2015, the date of maturity.
If the discounting is accounted for as a secured borrowing, the entry on discounting of the note
includes:
a. A Credit to liability for note receivable discounted, 5,000,000.
b. A Credit to note receivable discounted, 5,000,000.
c. A credit to interest expense, 28,750
d. A debit to interest expense of 128,750
3. Neo Company has experienced a critical cash flow problem largely occasioned by collection
problems with customers.

Consequently, it has become involved in a number of transactions relating to notes receivable.

On May 1 received a 300,000, six-month, 12% interest bearing note from MN, a customer, in
settlement of an account.

On August 1 Neo company discounted the MN note at the bank at 15%.

On November 1 MN defaulted on the 300,000 note. Neo company paid the bank the total
amount due plus a 12,000 protest fee and other bank charges.
The entry to record the payment made to the bank by Neo company on November 1 includes
a:
a. A credit to Cash of 318,000.
b. A Credit to Notes receivable of 330,000
c. Debit to Accounts receivable of 330,000.
d. A credit to liability for notes receivable discounted of 300,000.

4. Charmel Company provided the following data for the current year:

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 June 1 Received from Aye Company a 5,000,000, 12% 90-day note for merchandise sold.

July 1 Received from Bee Company a 6,000,000, 10% 60-day note in full payment of an
account.
Also discounted the Aye note at the bank at 12%.

July 16 Discounted the Bee company note at the bank at 12%.

August 30 The bank notified Charmel company that the Bee company note was paid while
Aye company defaulted on the note and charged the amount of principal, interest and a fee of
20,000 against Charmel company’s bank account.

December 30 Received full payment from Aye company for the dishonoured note plus12%
annual interest on the total amount due for four months.

The discounting of the note is a conditional sale.

What is the amount of cash received from Aye company on December 30?
a. 5,170,000
b. 5,376,800
c. 5,000,000
d. 5,206,800

5. Charmel Company provided the following data for the current year:

June 1 Received from Aye Company a 5,000,000, 12% 90-day note for merchandise sold.

July 1 Received from Bee Company a 6,000,000, 10% 60-day note in full payment of an
account.
Also discounted the Aye note at the bank at 12%.

July 16 Discounted the Bee company note at the bank at 12%.

August 30 The bank notified Charmel company that the Bee company note was paid while
Aye company defaulted on the note and charged the amount of principal, interest and a fee of
20,000 against Charmel company’s bank account.

December 30 Received full payment from Aye company for the dishonoured note plus12%
annual interest on the total amount due for four months.

The discounting of the note is a conditional sale.

The entry on August 30 includes:
a. A debit to Note receivable discounted of 6,000,000

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 b. A debit to liability for note receivable 6,000,000
c. A debit to cash of 6,000,000.
d. A credit to note receivable 6,100,000.

6. Charmel Company provided the following data for the current year:

July 1 Received from Bee Company a 6,000,000, 10% 60-day note in full payment of an
account.

July 16 Discounted the Bee company note at the bank at 12%.

August 30 The bank notified Charmel company that the Bee company note was paid.

The amount of cash received from discounting of the note as a conditional sale amounted to:
a. 6,016,500
b. 6,000,000
c. 6,008,500
d. 6,025,000
7. A 90-day 15% interest – bearing note receivable is sold to a bank with recourse after being
held for 30 days. The proceeds are calculated using a 12% interest rate. The note receivable
has been:
a. Discounted
b. Pledged
c. Discounted and pledged
d. Discounted and assigned
8. A 90-day 15% interest bearing note receivable is sold to a bank without recourse after being
held for 60 days. The proceeds are calculated using a 12% interest rate. The amount credited to
note receivable at the date of the discounting transaction would be
a. The same as the cash proceeds.
b. Less than the face value of the note.
c. The face value of the note.
d. The maturity value of the note.
9. A note receivable bearing a reasonable interest rate is sold to a bank with recourse. At the
date of the discounting, the note receivable discounted account should be
a. Decreased by the net proceeds from discounting.
b. Increased by the net proceeds from discounting.
c. Increased by the face amount of the note.
d. Decreased by the face amount of the note.
10. Depending on certain criteria, a note receivable discounted with recourse is recognized as
a. Conditional sale
b. Secured borrowing
c. Either as conditional sale or secured borrowing.
d. Neither conditional sale nor secured borrowing.
11. If a note receivable is discounted without recourse

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 a. The contingent liability may be disclosed.
b. Liability for note receivable discounted should be credited.
c. Notes receivable should be credited.
d. The transaction should be accounted for as a borrowing.
12. If a note receivable is sold to a bank with recourse, the note receivable discounted account
should be reported as
a. Contra asset for the proceeds from discounting.
b. Liability for the proceeds from discounting.
c. Liability account for the face of the note.
d. Contra asset account for the face amount of the note.

13. Accounting for the interest in a non interest bearing note receivable is an example of what aspect of accounting theory?
a. Matching
b. Verifiability
c. Substance over form
d. Accounting entity
14. On August 1, 2017, Haggorn Company’s 600,000 one- year, noninterest-bearing own note
due July 31, 2018 was discounted at the bank at 10.8%. The entity used the straight line
method of amortizing discount. What is the carrying amount of the note payable on December
31, 2017?
a. 600,000
b. 597,000
c. 562,200
d. 532,200
15. Undaunted company discounted its own 3,500,000 one year note at a bank, at a discount
rate of 12%, when the prime rate was 10%. In reporting the note in the statement of financial
position prior to maturity, what rate should be used in recording interest expense?
a. 10.0%
b. 10.7%
c. 12.0%
d. 13.6%
16. Fair Company received from a customer a one-year, 400,000 note bearing annual interest
of 8%. After holding the note for six months, the entity discounted the note at the bank at an
effective interest rate of 10%. What amount of cash was received from the bank?
a. 432,000
b. 419,048
c. 410,400
d. 396,190
17. On July 1, 2017, Yasmin Company sold goods in exchange for 400,000, 8-month,
noninterest-bearing note receivable. At the time of the sale, the note’s market rate of interest
was 12%. What amount was received when the note was discounted at 10% on September 1,
2017?
a. 388,000
b. 387,600
c. 380,000

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 d. 376,000
18. Sapphiro company accepted from a customer a 3,000,000, 90-day, 12% note dated August
31, 2017. On September 30, 2017, the entity discounted without recourse the note at 15%.
However, the proceeds were not received until October 1, 2017. In the income statement for
the year ended September 30, 2017, what amount should be reported as loss on the note
receivable discounting?
a. 12,750
b. 17,250
c. 30,000
d. zero
19. On June 30, 2017, Barbie Company discounted at the bank a customer’s 540,000, 6-month,
10% note receivable dated April 30, 2017. The bank discounted the note at 12%. What amount
should be reported as proceeds from the discounted note?
a. 507,600
b. 518,400
c. 544,320
d. 555,660
20. On July 1, 2017, Lequin Company sold equipment to a customer for 300,000. The entity
accepted a 10% note receivable for the entire sale price. This note is payable in two equal
instalments of 150,000 plus accrued interest on December 31, 2017 and December 311, 2018.
On July 1, 2018, the entity discounted the note at a bank at an interest rate of 12%. What is the
amount received from the discounting of note receivable?
a. 145,200
b. 148,050
c. 151,050
d. 155,100

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30. On Jan 1,2007, Kirk Company sold goods to Adrian Company, Adrian signed a non interest bearing note requiring
payment of P600,000 annually for seven years. The first payment was made on Jan 1,2007. The prevailing rate of
interest for this type of note at date of issuance was 10%. Information on present value factors is as follows:
For 6 period PV of 1 at 10% 0.56 PV annuity of 1 4.36
For 7 period PV of 1 at 10% 0.51 PV annuity of 1 4.87

Kirk should record sales revenue in Jan 2007 of

a. 3,216,000 b. 2,922,000 d. 2,616,000 d. 2,142,000

22. After being held for 30n days, 120-day 12% interest bearing note receivable was discounted
at a bank at 15%. The amount received from the bank is equal to
a. Maturity value less discount at 12%.
b. Maturity value less discount at 15%.
c. Face value less discount at 12%.
d. Face value less discount at 15%.

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 23. If a note receivable is discounted with recourse
a. A contingent liability does not exist.
b. Note receivable discounted should be credited.
c. Liability for note discounted should be credited.
d. Note receivable must be credited.

24. Notes receivable discounted with recourse should be

a. Excluded from total receivables without disclosure.
b. Excluded from total receivables with disclosure of the contingent liability.
c. Included in total receivables without disclosure.
d. Included in total receivables with disclosure.
14. If receivables are hypothetecated against borrowings, the amount of receivables involved should be
a. Disclosed in the statements or notes
b. Excluded from the total receivables, with disclosure
c. Excluded from the total receivables, with no disclosure
d. Excluded from the total receivables and a gain or loss is recognized between the face value and the amount
of borrowings.
15. 19. Bruno received from a customer a one year, 375,000 note bearing annual interest of 8%. After holding the note
for 6 months, Bruno discounted the note at Super Bank at an effective interest rate of 10%.
16. How much did Bruno received from the bank? b. 384,750
17.
20. On Dec. 31, 2008, Ball company finished consultation services and accepted in exchange a promissory note with a
face value of 200,000, a due date of Dec. 31, 2011, and a stated rate of 5%, with interest receivable at the end of each
year. The fair value of the services is not readily determinable and the note is considered to have an appropriate
imputed rate of interest of 10%.
The following interest factors are provided:
Interest rate
Table factors for 3 periods 5% 10%
Future value of 1 1.15763 1.33100
Present value of 1 .86384 .75132
Future value of ordinary annuity of 1 3.15250 3.31000
Present value of ordinary annuity of 1 2.72325 2.48685
What is the present value of the note? c. 175,133

23. On August 1, 2008, Lam Company’s 1,000,000 one-year, non-interest bearing note due July 31, 2009, was discounted at Second Bank at
10.8%. Lam uses the straight line method of amortizing discount. What amount should Lam report for note payable in its Dec. 31, 2008
statement of financial position? c. 937,000

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