Notes Payable – Theories

I. An interest bearing note is initially recorded as its face value since this represents the
present value of the note.
II. After initial, recognition, an interest-bearing note is measured at face value plus discount

1. Which of the following is true

a. I only
b. II only
c. Both I and II
d. None I and II

2. When a note is issued for cash, the present value is equal to the cash proceeds. The entry to
record the issuance of the note is
a. Cash XX
Notes Payable XX
b. Cash XX
Discount on Notes Payable XX
Notes Payable XX
c. Notes Receivable XX
Notes Payable XX
d. Cash XX
Interest Payable XX
Notes Payable XX

3. Bonds bearing an interest rate of 15% were issued above their face value. This implies that
market r ate of interest
a. At date of issue lower than 15%
b. At date of issue higher than 15%
c. At date of issue equal to 15%
d. At the date of reporting date is higher than 15%

4. Under the effective interest method of amortizing bond premium on term bonds,
a. Interest expense increase each period
b. Interest expense decrease each period
c. Interest expense remains the same for each period
d. Interest rate varies from period to period
5. The gain or loss on the retirement of bonds prior to maturity should be
a. Recognized in profit or loss during the period of retirement
b. Amortized over remaining term of the bond
c. Credited or debited to share premium
d. Disclosed