Note payable to J. Lott, majority stockholder of American Widgets. The note is due in full December

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Question:

Note payable to J. Lott, majority stockholder of American Widgets. The note is due in full December 31, 2017. The audited previous year-end balance was $300,000 and a $100,000 principal reduction occurred during 2015. The note carries 0% interest and is unsecured. The auditor has confirmed without exception the note payable terms and conditions. The $100,000 principal reduction by check dated December 31, 2015. The check cleared the bank January 8, 2016. Because the note bears 0% interest, American Widgets accrued no interest for this note.

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

a. It is not possible to have a note payable with 0% interest.

b. The note should be classified as a current liability because it is payable to a shareholder.

c. Interest should be accrued at an appropriate market rate.

d. There should not have been a principal reduction because the note is due in full on December 31, 2017.