Chapter 16 - Notes Payable and Notes Receivable

Question 1

ACCOUNTING FOR NOTES PAYABLE

promissory notes

Answer 1

• is a written promise to pay a certain amount of money at a specific future time
• is a negotiable instrument

Question 2

ACCOUNTING FOR NOTES PAYABLE

interest

Answer 2

• is the fee charged for the use of money
• is calculated used the formula :
  Interest = Principal x Rate x Time or I = PRT
• the time period is indicated in frictions of a year - 360 days

Question 3

ACCOUNTING FOR NOTES PAYABLE

banker’s year

Answer 3

• a 360-day period used to calculate interest on a note

Question 4

ACCOUNTING FOR NOTES PAYABLE

principal

Answer 4

• the amount shown on the face of the note

Question 5

ACCOUNTING FOR NOTES PAYABLE

face value

Answer 5

• an amount of money indicated to be paid, exclusive of interest or discounts

Question 6

ACCOUNTING FOR NOTES PAYABLE

maturity value

Answer 6

• the total amount (principal plus interest) payable when a note comes due

Question 7

ACCOUNTING FOR NOTES PAYABLE

note payable

Answer 7

• a liability representing a written promise by the maker of the note (the debtor) to pay another party (the creditor) a specified amount at a specified future date

Question 8

ACCOUNTING FOR NOTES PAYABLE

discounting

Answer 8

• deducting the interest from the principal on a note payable or receivable in advance

Question 9

ACCOUNTING FOR NOTES PAYABLE

Notes Payable

Answer 9

• at the end of each accounting period, a schedule of notes payable is prepared from the information in the notes payable register
• the schedule of notes payable must agree with the Notes Payable account in the general ledger
• For each note payable, the notes payable register shows the following information :
  
  • the issue date
  • the payee
  • where the note is payable
  • the term of the note
  • the maturity date
  • the face amount
  • the Interest rate, if any
  • the interest amount, if any
• Notes due within one year are classified as current liabilities
• Notes due in more than one year are classified as long-term liabilities

Question 10

ACCOUNTING FOR NOTES PAYABLE

negotiable instrument

Answer 10

• a financial document containing a promise or order to pay that meets all requirements of the Uniform Commercial Code in order to be transferable to another party
• The UCC requirements specify that to be negotiable an instrument must :
  
  • be in writing and must be signed by the maker or drawer
  • contain an unconditional promise or order to pay a definite amount of money
  • be payable either on demand or at a future time that is fixed or that can be determined
  • be payable to order of a specific person or to the bearer
  • clearly name or identify the drawer if addressed to a drawee
• checks are negotiable instruments
• another important negotiable instrument is the promissory note
• promissory notes may be either notes payable or notes receivable