Question

Ireland Corporation obtained a $40,000 note receivable from a customer on June 30, 2016. The note, along with interest at 6%, is due on June 30, 2017. On September 30, 2016, Ireland discounted the note at Cloverdale bank. The bank's discount rate is 10%. What amount of loss should Ireland recognize on September 30, 2016? Please show the steps.
A. $780
B. $1,380
C. $1,800
D. $3,180

Answer 1

Answer:

Total loss recognized = $1,380

Explanation:

Given:

Value of note receivable = $40,000

Rate of interest = 6% = 0.06

Date of discount = September 30, 2016

Discount rate = 10% = 0.10

Discount period = 9 months  / 12 = 0.75

Computation of maturity value:

Maturity value = $40,000 + ($40,000 × 0.06)

Maturity value  = $40,000 + $2400

Maturity value  = $42,400

Computation of amount received on discount from bank:

Amount received on discount from bank = Maturity Value - (Maturity Value × Discount rate × Discount Period)

= $42,400 - ($42,400 × 0.10 × 0.75)

= $42,400 - $3,180

Amount received on discount from bank = $39,220

Value of note at the time of Discount = $40,000 + ($40,000 ×0.06 × {1-0.75})

= $40,000 + $600

Value of note at the time of Discount = $40,600

Total loss recognized = Value of note at the time of Discount - Amount received on discount from bank

Total loss recognized = $40600 - $39220

Total loss recognized = $1,380