Question

Cypress Oil Company's December 31, 2021, balance sheet listed $973,000 of notes receivable and $21,000 of interest receivable included in current assets. The following notes make up the notes receivable balance:

Note		1		Dated 8/31/2021, principal of $450,000 and interest at 9% due on 2/28/2022.
Note		2		Dated 6/30/2021, principal of $250,000 and interest due 3/31/2022.
Note		3		$280,000 face value noninterest-bearing note dated 9/30/2021, due 3/31/2022. Note was issued in exchange for merchandise.

The company records adjusting entries only at year-end. There were no other notes receivable outstanding during 2021.

Required:
1. Determine the rate used to discount the noninterest-bearing note.
2. Determine the explicit interest rate on Note 2. (Round your intermediate calculations to the nearest whole dollar amount.)
3. What is the amount of interest revenue that appears in the company’s 2021 income statement related to these notes?
  

Answer 1

Above question is related to discount on notes receivable and interest related to that notes. Refer below images for best solution.
1. The Rate used to discount the non interest - bearing note. Total tace value of notes for the year = $450000 + $ 250000 & $280000 = $ 980000 Balance Sheet carrying valve () Book value as on balance sheet 973000 date ! Difference * Note 3 is a Therefore, is the remaining discount on note 3, &7000. 6-month note with three months remaining. & 7000 represents one-half of the total discount of $ 14000 $ 14000 $280000 = 0.05 *100 = 5•)• x 1? = 10%. Discount rate to Therefore, discount the 10% is the non-intuest discount rate osed bearing note.

2. Explicit Interest Rate on Note 3 :- Total accrued interest receivable = $21000 Less: Interest accrued on note = $(13509 (working) Interest accrued on note a $7.500 Explicit Rate = $7500 + $ 250000 = 0.03 X100 = 31.43 - 6.1 Working : : Interest accrued on note = $ 450000 x 91 x 4 = $ 13500 that appears in 3. company's Amount of Interest Revenue 2021 Income Statement. Note interest - $ 13500 Note ② interest - $ 7500 Note ② interest = $7000 $28000010%. * 8000 Total Interest Revenue &