Question

On November 1, 2016, a $216,000, 9-month, noninterest-bearing note is issued at a 10% discount rate.

Answer 1

Answer:

1) effective interest rate (for the 9 months period)= (1 + 10%/12)⁹ - 1 = 1.07754 -1 = 0.07754 = 7.75%

2) accrued interest = ($15,545/9) x 2 = $3,454.44 = $3,454

December 31, 2016, accrued interest on non-interest bearing note

Dr Discount on notes receivable 3,454

    Cr Interest revenue 3,454

3) July 31, 2017, collection of non-interest bearing note receivable

Dr Cash 216,000

Dr Discount on notes receivable 12,091

    Cr Notes receivable 216,000

    Cr Interest revenue 12,091

4) November 1, 2016, non-interest bearing note receivable issued [I will assume that the note receivable was made for a sales operation (if it was made for a loan, you can just change sales revenue for cash)]

Dr Notes receivable 216,000

    Cr Sales revenue / cash 200,455

    Cr Discount on notes receivable 15,545

Explanation:

we have to first calculate the present value of the note using the 10% discount rate:

PV = $216,000 / (1 + 10%/12)⁹ = $216,000 / (1 + 0.8333%)⁹ = $200,454.88 = $200,455