1. Note payable to First Commercial Bank. The note is due in full January 1, 2019. The audited previous year end balance was $50,000. An additional $300,000 of proceeds from this note was drawn by American January 31, 2015 and a $100,000 principal reduction occurred on June 30, 2015. The note carries 4.2% annual interest, which is due and payable on the 25th day of each month. The note is secured by inventories. The auditor has confirmed with one exception the note payable terms and conditions with respect to a dividend. The note terms prohibit American from declaring or paying any dividends for the duration of the loan. On September 2, 2015 American declared and paid an $80,000 dividend to its shareholders. The bank has the right to demand immediate repayment of the note balance if the dividend condition is violated and the bank refuses to waive this violation. The proceeds drawn during 2015 were authorized by the board of directors of American; the loan agreement terms and conditions were agreed with the bank and the underlying note documentation. A validated deposit ticket was inspected by the auditor without exception. American Widgets accrued no interest for this note. From the dropdown menu options, select the item that is most likely the main problem with this note.

10.2 Select the item that is most likely the main problem with this note.

a. The interest rate appears to be very low.

b. There is no accrual for interest from December 25 to December 31.

c. The dividend declared and paid in 2015 causes this loan to be accelerated, which requires the loan to be reclassified as a current liability.

d. It is not permitted to have loan proceeds received and a partial principal repayment in the same year.

2. Mortgage note payable to Gigantic Building & Loan Association. The note requires $5,000 principal and accrued interest to be paid on the 5th day of each month. The note balance is due in full December 31, 2016. The auditor has confirmed without exception the note payable terms and conditions. All principal and interest payment were made during the year including a payment made on December 5, 2015. The auditor proposed a reclassification entry for the current portion of the balance payable during 2016. American Widgets accrued no interest for this note. From the dropdown menu options, select the item that is most likely the main problem with this note.

10.3 Select the item that is most likely the main problem with this note.

a. The interest rate appears to be very low.

b. A loan with required monthly payments should not have any balance due at maturity.

c. The entire unpaid loan balance should be reclassified as current as the loan matures December 31, 2016.

d. The proposed reclassification entry should not be made because this is a mortgage loan secured by real estate.