Multiple Choice
In the context of notes payable, why do some lenders require borrowers to secure a note with collateral?
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9. Current Liabilities
Notes Payable
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Join thousands of students who trust us to help them ace their exams!Watch the first videoMultiple Choice
Which of the following is a key event in accounting for notes payable?
A
Revaluation of inventory
B
Payment of interest and principal at maturity
C
Declaration of dividends
D
Issuance of the note
Verified step by step guidance1
Understand the concept of notes payable: Notes payable are written agreements where a borrower promises to pay a specific amount of money at a future date, often with interest. They are classified as liabilities on the balance sheet.
Identify the key events associated with notes payable: These typically include issuance of the note, accrual of interest, payment of interest, and repayment of the principal amount at maturity.
Analyze the options provided: Revaluation of inventory and declaration of dividends are unrelated to notes payable. Payment of interest and principal at maturity is a key event, but the issuance of the note is the first and foundational event in accounting for notes payable.
Focus on the issuance of the note: When a note is issued, the borrower records the liability by debiting cash (or another asset account) and crediting notes payable. This establishes the obligation to repay.
Conclude that the issuance of the note is the correct answer: It is the initial event that sets the stage for all subsequent accounting activities related to the note payable.
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