Question

Cypress Oil Company's December 31, 2021, balance sheet listed $955,000 of notes receivable and $24,200 of interest receivable included in current assets. The following notes make up the notes receivable balance:

Note		1		Dated 8/31/2021, principal of $430,000 and interest at 12% due on 2/28/2022.
Note		2		Dated 6/30/2021, principal of $280,000 and interest due 3/31/2022.
Note		3		$250,000 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?

1. 2. 3. Discount rate Interest rate Interest revenue

Answer 1

1) Total face value of notes = (430000+280000+250000) Total face value of notes = S 960,000/. Balance sheet carrying value = $ 955,000/. Difference is the remaining discount on note 3 = (960000-955000) = $ 5,000/. Note 3 is a 6-month note, with three months remaining. Hence S 5,000 represents half of total discount S 10,000/. Discount the non-interest-bearing note = (10000/250000)*100 = 4%*(12/6) = 8% Discount the non-interest-bearing note = 8% 2) Explicit interest rate on Note 2 :- Particulars Total accrued interest receivable Less: Interest accrued on note 1 (430000*12%*(4/12)) Less: Interest accrued on note 2 Amounts 24,200 (17,200) 7,000 Interest rate is = (7000/280000)*100*(12/6) Interest rate is = 5% 3) Total interest revenue is :- Amounts Particulars Interest on Note 1 Interest on Note 2 Interest on Note 3 (250000*8%*(3/12)) Total Interest revenue 17,200 7,000 5,000 29,200