Question

Cypress Oil Company's December 31, 2018, balance sheet listed $886000 of notes receivable and $22.100 of interest recevable included in Current assets. The following notes make up the notes receivable balance Note 1 Dated 8/31/2018, principal of $420,000 and interest at 10% due on 2/28/2019 Note 2 Dated 6/30/2018, principal of $270,000 and interest due 3/31/2019 Note 3 $200,000 face value noninterest-bearing note dated 9/30/2018, due 3/31/2019. Note was issued in exchange for merchandise The company records adjusting entries only at year-end There were no other notes recewable outstanding . in 2018 2019. Note was Required: 1. Determine the rate used to discount the noninterest-bearing note 2. Determine the explicit interest rate on Note 2 3. What is the amount of interest revenue that appears in the company's 2018 income statement related to these notes Answer is complete but not entirely correct. Discount rate

Need to find the discount rate.

Answer 1

Answer 1. Discount rate : 8 %.

Explanation:

Total face value = $420,000 + $270,000 + $200,000 = $890,000

Balance sheet value as on Dec 31, 2018 = $886,000

Discount on noninterest bearing note = $890,000 - $886,000 = $4,000.

Note 3 is for six months starting 9/30/2018 & till Dec 31 2018 three moths already passed. Thus total discount at the time of issue of note = $4,000 * 2 = $8,000.

Discount rate on noninterest bearing note = ($8,000 / $200,000) * 12 months / 6 months = 8 %