Chapter 12 Notes Receivable

Question 1

Notes receivable are claims supported by ____ usually in the form of ___.

Answer 1

formal promises to pay, notes

Question 2

A negotiable promissory note is an ________ made by one person to another, signed by the ___, engaging to ____ or at a ____ a sum certain in money to order or to ____.

Answer 2

unconditional promise in writing, maker, pay on demand, fixed determinable future time, bearer

Question 3

A promissory note is a ___ in which one person, known as the ___, promises to pay another person, known as the ___, a definite sum of money that may be payable on demand or at a definite future date.

Answer 3

maker, payee

Question 4

The term “Notes Receivable” represents only claims arising from _____

Answer 4

sale of merchandise or service in the ordinary course of business.

Question 5

Notes receivable from officers, employees, shareholders, and affiliates shall be designated ___

Answer 5

separately

Question 6

When a promisory note matures and is not paid, it is said to be ___

Answer 6

dishonored

Question 7

Dishonored notes shall be removed from the N/R Account and transferred to___ at an amount to include, if any, ____. The entries to record this are:

Answer 7

A/R, interest and other charges, Dr. A/R at balancing amount, Dr. ~Other Charges~ at the charge cost, Cr. N/R at amount dishonored, Cr. Interest Income (if any) at the computed accrued income

Question 8

An overdue note has lost part of its status as a negotiable instrument and really represents only an ____

Answer 8

ordinary claim against the maker.

Question 9

Present Value: Sum of all future cash flows discounted using the _____

Answer 9

prevailing market rate of interest (aka effective interest rate) for similar notes

Question 10

Short-term N/R shall be measured at ___

Answer 10

Face Value

Question 11

Cash flows relating to short-term N/R are not discounted because the effect of ___ is usually ____

Answer 11

discounting, note material

Question 12

Initial measurement of interest bearing long-term notes are at ____, which is actually the ____ upon issuance. Noninterest-bearing long-term notes are measured at ____ which is the ______.

Answer 12

face value, present value, present value, discounted value of the future cash flows using the effective interest rate

Question 13

Subsequent to initial recognition, long-term N/R shall be measured at ___ using the ____

Answer 13

amortized cost, effective interest method

Question 14

Amortized Cost =

Answer 14

Initial measurement of N/R - Principal Repayment - reduction for impairment or uncollectibility +/- cumulative amortization of any difference between the initial carrying amount and the principal maturity amount

Question 15

For long-term noninterest-bearing N/R, the Amortized Cost =

Answer 15

Present Value + Amortization of the discount, or, Face Value - Unamortized Unearned Interest Income

Question 16

The entries to record a the sale of an Asset for an interest bearing long-term N/R are:

Answer 16

Dr. N/R at face value, Dr. Loss on sale of asset (if any) as balancing amount, Dr. Acc Dep (if any) at the amount being retired (meaning, % of asset sold times total acc dep. Usually and hopefully the Assets involved here will be sold in full) Cr. Asset at cost, Cr. Gain on sale of asset (if any) at balancing amount

Question 17

The entries to record the accrual of interest of interest bearing long-term N/R at the first reporting period are:

Answer 17

Dr. Accrued Interest Receivable at face value*stated rate, Cr. Interest Income at the same

Question 18

The entries to record the accrual of interest of interest bearing long-term N/R at subsequent reporting periods are:

Answer 18

Dr. Accrued Interest Receivable at (Principal Value + Total Interest Accrued in the previous periods)*Stated Rate, Cr. Interest Income at the same

Question 19

The entries to recrod the accrual of interest and the settlement of interest bearing long-term N/R at the maturity date are:

Answer 19

Dr. Cash at The future value of the Face Value of the N/R using the stated rate and the given period = Principal Value + Total Interest Accrued in the previous periods + Stated Rate * (Principal Value + Total Interest Accrued in the previous periods ), Cr. N/R at face value, Cr. Accrued Interest Receivable at Total Interest Accrued in the previous periods, Cr. Interest Income at (Principal Value + Total Interest Accrued in the previous periods)*Stated Rate

Question 20

The cash received at the maturity date of interest bearing long-term N/R at the maturity date is equal to ____

Answer 20

The future value of the Face Value of the N/R using the stated rate and the given period

Question 21

The entries to record a sale of an Asset (in the ordinary course of business) for a noninterest bearing long-term N/R are:

Answer 21

Dr. N/R at face value, Cr. Sales at Face Value - Present Value [which an be equal to the cash sale price of the asset], Cr. Uneraned Interest Income at balancing amount (Face Value of Note - Present Value [which can be the cash sale price of the asset]

Question 22

The entries to record the first principal payment to the recording entity are:

Answer 22

Dr. Cash at the amount specified, Cr. N/R at the same amount

Question 23

The entires to record the recognition of unearned interest as income over the term of the note are:

Answer 23

Dr. Unearned Interest Income at Principal Amount*Fraction, Cr. Interest Income at the same amount. Fraction = Principal Amount/(Face Value of Note + All Subsequent Balances of the Note until Maturity Date)

Question 24

The entries to record a disposal of an Asset for a noninterest bearing long-term N/R with a down payment are:

Answer 24

Dr. Cash at the downpayment, Dr. N/R at the face value, Dr. Acc Dep (if any) at the amount being retired, Dr. Loss on sale of asset (if any) at balancing amount, Cr. Equipment at cost, Cr. Unearned Interest Income at Face Value of note - Present Value of note, Cr. Gain on sale of Asset (if any) at balancing amount. Gain(Loss) on sale of asset can also be computed = (Present value of note + Cash received-down payment) - Carrying Cost of asset. Note that (Present value of note + Cash received-down payment) = Sale price

Question 25

The entries to record the interest income from the disposal of an Asset for a noninterest bearing long-term N/R with a down payment are:

Answer 25

Dr. Unearned Interest Income at X, Cr. Interest Income at the same amount. X = value computed using the Effective Interest Method = Present Value of note at the time when interest starts accruing * Effective Interest Rate

Question 26

In noninterest bearing long-term N/R with principal payments at subsequent periods, the Present Value for the subsequent period is computed by:

Answer 26

Present Value of note at previous period - [Annual Collection on Principal - (Present Value of note at previous period*Effective Interest Rate)]