Question

The March Madness Company (MMC) converted an account receivable into a 90-day note on 10/15. The face amount of the note was $10,000. The interest rate was 10% (annual rate). On 11/24 MMC discounted the note at the Big TenBank the discount rate was 12%.

Determine the cash proceeds received from the bank and provide journal entries for both events detailed above.

Answer 1

Answer

• All working forms part of the answer
• Workings

Notes amount	$10000
Interest Rate	10%
Annual Interest	$1000
90 days Interest [assumed 365 days in a year]	$246.58
Total receivable on maturity	$10246.58
Note issued on	15-Oct
Discounted on	24-Nov
Number of days Notes not discounted	40 days
Interest Revenue for 40 days	$109.59
Maturity value	$10246.58
Discounted at	12%
Annual discount	$1229.59
50 days discount	$168.44
Net received	$10078.14

Notes face Value	$10000
Interest revenue earned	$109.59
Total	$10109.59
Net received	$10078.14
Interest expense	$31.45

• Journal Entries based on above workings

Date	Journal	Debit	Credit
15-Oct	Notes receivables	$               10,000.00
	Accounts receivables		$        10,000.00
	(notes issued)
24-Nov	Cash	$               10,078.14
	Interest expense	$                        31.45
	Notes receivables		$        10,000.00
	Interest Revenue		$              109.59
	(notes discounted)