Module 8 - Theories

Module 8: Note Payable
THEORIES
1. An entry 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 a short-term non interest 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. An entry shall measure initially a note payable not designated at fair value through profit or
loss at
a. Face amount
b. Fair value
c. Fair value plus transaction cost
d. Fair value minus transaction cost
6. After initial recognition, an entry shall measure a note payable at
a. Amortized cost
b. Fair value through profit or loss
c. Either amortized cost or fair value through profit or loss
d. Either amortized cost or fair value through other comprehensive income
7. Under the fair value option, an entity shall measure the note payable initially at
a. Face amount
b. Fair value plus transaction cost
c. Fair value minus transaction cost
d. Fair value
8. Which of the following statements is incorrect in relation to the fair value option of measuring
note payable?
a. At initial recognition, an entity may irrevocably designate the note payable as at fair
value through profit or loss.
b. The interest expense on the note payable is recognized using the stated interest rate.
c. After initial recognition, the note payable is remeasured at fair value at every year-end
with changes in fair value generally recognized in profit or loss.
d. All of these statements are true.
9. Which statement 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 deduction from face amount note payable.
c. The discount on note payable represents interest charges applicable to future periods.
d. Amortizing the discount on note payable gradually decreases the carrying amount of
liability over the life of the note.
10. When a note payable with no ready markets is exchanged for property whose fair value is
currently indeterminable
a. The present value of note payable must be approximately 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 the value for the property
d. Both entities involved in the transaction should negotiate a value to be assigned to the
property.
11. When a note payable is issued for property, the present value of 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
12. The 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 note is material different from the cash sale price for similar property
d. The stated interest rate is equal to the market rate
13. The discount resulting from the determination of the present value of the nite payable should
be reported as
a. Deferred credit
b. Direct deduction from the face amount of note
c. Deferred charge
d. Addition to the face amount of note
14. Which statement is correct when an entity issued a note payable with no stated interest rate
in exchange for a depreciable asset?
a. The asset should be depreciated over the term of the note payable
b. If fair value is unavailable, the note payable should be recorded at present value
discounted at the market rate of interest
c. Both the note and the asset are recorded at face amount of note payable
d. The note payable is recorded at face amount even if the fair value of asset is readily
available.

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Module 8: Note Payable

9. Which statement concerning discount on note payable is Incorrect?

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