Problem 8 2 Multiple Choice (AICPA Adapted)

1. An entity issued a note solely in exchange for cash. Assuming that the items listed
below differ in amount the present value of the note at issuance is equal to

a. Face amount
b. Face amount discounted at the prevailing interest rate
c. Proceeds received
d. Proceeds received discounted at the prevailing interest rate

2. If the present value of a note issued in exchange for a property is less than its face
amount, the difference should be

a. Included in the cost of the asset

b. Amortized as interest expense over the life of the note
c. Amortized as interest expense over the life of the asset
d. Included in interest expense in the year of issuance

3. An entity borrowed cash from a bank and issued to the bank at a short-term
noninterest bearing note payable. The bank discounted the note at 10% and
remitted the proceeds to the entity. The effective interest rate paid by the entity in
this transaction would be

a. Equal to the stated discount rate of 10%

b. More than the stated discount rate of 10%
c. Less than the stated discount rate of 10%
d. Independent of the stated discount rate of 10%

4. At issuance date, the present value of a promissory note is equal to the face amount
if the note

a. Bears a stated rate of interest which is realistic.

b. Bears a stated rate of interest which is less than the prevailing market rate for
similar notes.
c. Is noninterest bearing and the implicit interest rate is less than the prevailing
market rate for similar notes.
d. Is noninterest bearing and the implicit interest rate is equal to the prevailing
market rate for similar notes.

5. The discount resulting from the determination of the present value of a note
payable should be reported in the statement of financial position as
 a. Deferred credit separate from the note.
b. Direct deduction from the face amount of the note.
c. Deferred charge separate from the note.
d. Addition to the face amount of the note.

6. Which of the following statements concerning discount on note payable is

incorrect?

a. Discount on note payable may be debited when entity discounts its own note
with the bank.
b. The discount on note payable is a contra liability account which is shown as a
deduction from note payable.
c. The discount on note payable represents interest charges applicable to future
periods.
d. Amortizing the discount on note payable causes the carrying amount of the
liability to gradually decrease over the life of the note.

7. A note payable with no ready market is exchanged for property whose fair value is
currently indeterminable. When such a transaction takes place

a. The present value of the note payable must be approximated using an imputed
interest rate.
b. The note payable should not be recorded until the fair value of the property
becomes evident.
c. The entity receiving the property should estimate a value for the property.
d. Both entities involved in the transaction should negotiate a value to be assigned
to the property.

8. When a note payable is issued for property, the present value of the note is
measured by

a. The fair value of the property

b. The fair value of the note payable
c. Using an imputed interest rate to discount all future payments on the note
payable
d. All of these are considered in measuring the present value of the note payable

9. When a note payable is exchanged for property, the stated interest rate is presumed
to be fair when

a. No interest rate is stated.

b. The stated interest rate is unreasonable.
c. The face amount of the note is materially different from the cash sale price for
 similar property.
d. The stated interest rate is equal to the market rate.

10. On October 1, 2014, an entity borrowed cash and signed a three-year interest
bearing note in which both the principal and interest are payable on October 1,
2017. On December 31, 2014, accrued interest should

a. Be reported as current liability

b. Be reported as noncurrent liability
c. Be reported as part of the note payable
d. Not be reported