Cypress Oil Company\'s December 31, 2016, balance sheet listed $735,000 of notes

Question

Cypress Oil Company's December 31, 2016, balance sheet listed $735,000 of notes receivable and $21,600 of interest receivable included in current assets. The following notes make up the notes receivable balance: Note 1 Dated 8/31/2016, principal of $340,000 and interest at 12% due on 2/28/2017. Note 2 Dated 6/30/2016, principal of $200,000 and interest due 3/31/2017. Note 3 $200,000 face value noninterest-bearing note dated 9/30/2016, due 3/31/2017. Note was issued in exchange for merchandise. The company records adjusting entries only at year-end. There were no other notes receivable outstanding during 2016. Required: 1. Determine the rate used to discount the noninterest-bearing note.

Explanation / Answer

Answer:

Total face value of the notes = 340000+ 200000 + 200000 = $740000

Balance sheet carrying value = 735000

Difference is the remaining discount on note 3 = 5000

Note 3 is a 6- month note, with 3- months remaining. Therefore, $5000 represents one - half of the total discount of $10000 ($5000 *2)

$10000/$200000 = 5%*12/6 = 10% discount rate.

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