Cypress Oil Company\'s December 31, 2013, balance sheet listed $645,000 of notes

Question

Cypress Oil Company's December 31, 2013, balance sheet listed $645,000 of notes receivable and $16,000 of interest receivable included in current assets. The following notes make up the notes receivable balance:

Note 1 Dated 8/31/2013, principal of $300,000 and interest at 10% due on 2/28/2014.

Note 2 Dated 6/30/2013, principal of $150,000 and interest due 3/31/2014.

Note 3 $200,000 face value noninterest-bearing note dated 9/30/2013, due 3/31/2014. Note was issued in exchange for merchandise.

The company records adjusting entries only at year-end. There were no other notes receivable outstanding during 2013.

Required:

1. Determine the rate used to discount the noninterest-bearing note.

Discount rate %

2. Determine the explicit interest rate on Note 2. (Do not round intermediate calculations.)

Interest rate %

3. What is the amount of interest revenue that appears in the company%u2019s 2013 income statement related to these notes? (Do not round intermediate calculations.)

Interest revenue $

Explanation / Answer

1)Determine the rate used to discount the noninterest-bearing note

650,000 face value of notes - 645,000 balance sheet amount = 5,000

Since Note 3 is the only discounted note, it must have been discounted $5,000.

5,000 / 200,000 = 2.5% interest for 6 months

2.5% x 2 = 5% annual percentage rate

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