Question

A short-term note payable with no stated rate of interest should be !!!!! a. recorded at maturity value. b. recorded at the face amount. c. discounted to its present value. d. reported separately from other short-term notes payable.

Answer 1

A short-term note payable with no stated interest rate should be discounted to its present value. This is calculated using the market rate of interest to ensure that the economic substance of the transaction is reflected on the balance sheet.

Step-by-step explanation:

When recording a short-term note payable with no stated rate of interest, accounting principles require that the note be discounted to its present value. This present value becomes the note's carrying value on the balance sheet. To calculate the present value, we use the market rate of interest. This practice ensures the balance sheet reflects the economic reality of the transaction rather than just the nominal amounts.

For instance, consider a $3,000 two-year bond with an 8% interest rate. The yearly interest is $240 (3,000 × 8%). At maturity, the bond pays the last interest plus the principal. If the discount rate is equal to the interest rate (8%), the present value will equal the face value. But if the discount rate changes, say to 11%, the present value of the bond's future payments would be less than $3,000, thus affecting how much one should pay for the bond today. This exercise in calculating present discounted value is essential in financial accounting to match the recognition of economic events with their substance.

Answer 2

A short-term note payable with no stated rate of interest should be discounted to its present value .

Option C

Explanation:

Short-term bills due are a legal contractual obligation to pay a particular amount within one year or during the same accounting period.

In other words, the term redemption, plus the interest on a certain date that will be one year or fewer in the future is a signed loan or promissory note between the creditor and the borrower.

Compared to a deposit, short-term payable notes are negotiable and can be exchanged by approving them between the parties.

Suppose, for example Bill lends $1,000 to Raj. Raj signs a promissory note indicating that he will have to pay $1,000 plus 10% interest in six months to Bill.

After the first month, Bill determines that he needs some of his loans to be combined and he endorses the Raj-Tony promissory note, which is to pay back Tony's debt. Raj is now required to pay Todd the $1,000 plus the interest.