PROBLEM 2: MULTIPLE CHOICE-THEORY

1. Which of the following statements is incorrect?

a. Notes payable are initially recognized at fair value minus transaction costs.

b. Discount on notes payable is treated as a contra-liability account rather than an asset account.

c. A short-term, non-trade note payable may nevertheless be discounted if it clearly contains a financing
component.

d. All interest-bearing notes need not be discounted.

2. The concept that best supports the discounting of notes to their present value is

a. time value of money.

b. matching.

c. accrual basis.

d. legal form over substance

3. Which of the following rates is used to compute for the interest expense on a note payable?

a. stated rate

b. nominal rate

c. effective interest rate

d. coupon rate

4. Railing Co. issued a 4-year, P600,000, noninterest bearing note that requires payment in lump sum at
maturity date. Railing determined that the effective interest rate on the note is 12%. Which of the
following statements is correct?

a. Railing Co. will most likely measure the note on initial recognition by multiplying the face amount of
the note by PV of 1 @12%, n=4.

b. Railing Co. will most likely measure the note on initial recognition by multiplying the face amount of
the note by PV of ordinary annuity of 1 @12%, n=4.

c. Railing Co. will most likely measure the note on initial recognition by multiplying the face amount of
the note by PV of an annuity due of 1 @12%, n=4.

d. Any of these as an accounting policy choice.

5. On October 1 of this year, a company issued a one-year note payable that bears a market rate of
interest. The face amount of the note and the entire amount of the interest are due on September 30 of
next year. At December 31 of this year, the entity should report on its statement of financial position

a. interest expense for the interest accruing this year.

b. interest payable equal to one-year's interest on the note.

c. no interest payable.

d. interest payable for the interest accruing this year.

6. Drops Co. issues a 3-year, P600,000, noninterest bearing note that requires three equal annual
payments at the end of each year. The effective interest rate on the note is 14%. How should Drops Co.
measure the note on initial recognition?

a. P600,000 x PV of ordinary annuity of 1 @14%, n=3

b. P600,000 x PV of 1 @14%, n=3

c. P200,000 x PV of ordinary annuity of 1 @14%, n=3

d. P200,000 x PV of an annuity due of 1 @14%, n=3

7. An entity issues a three-year, P1M noninterest-bearing note that matures in lump sum payment. The
effective interest rate is 12%. Which of the following is correct?

a. The measurement of the note on initial recognition is computed as P1M x PV of an ordinary annuity of
1 @12%, n-4.

b. No interest expense shall be recognized on the note because it is noninterest-bearing.

c. The amortized cost of the note increases each year.

d. The amortized cost of the note decreases each year.

8. An entity issues a three-year, P1M noninterest-bearing note that matures in three equal annual
payments due at the end of each year. The effective interest rate is 12%. Which of the following is
correct?

a. The measurement of the note on initial recognition is computed as P1M x PV of an ordinary annuity of
1 @12%, n=4.

b. No interest expense shall be recognized on the note because it is noninterest-bearing.

c. The amortized cost of the note increases each year.

d. The amortized cost of the note decreases each year.

9. A company issued two one-year notes in exchange for merchandise. One note has a face amount of
P6,000 and was interest-bearing at an annual rate of 18%. The other note has a face amount of P7,080
and was non-interest-bearing (its implied interest rate was 18%).

a. The total amount of cash ultimately to be paid will be more for the interest-bearing note.

b. Both notes will cause the same total interest to be recognized.

c. The amount of interest expense that should be recognized is higher for the interest-bearing note.

d. The amount that should be debited to the inventory account is higher for the noninterest-bearing
note

10. On March 1,20x1, Nickelodeon Co. issued a P6,000, 12% dated January 1,20x1 in exchange for an
outstanding note payable of P6,000. The principal and the 6 months interest of the note are due on July
1,20x1. On initial recognition, which of the following accounts increased?

a. Prepaid interest

b. Interest payable

c. Discount on note payable

d. Interest expense