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Jackson Automotive Inc. of California agrees to sell specialized automotive parts to Hidatsi of Korea. Because the two companies have never done business with each other, Jackson requires a banker's acceptance as payment for the $1,000,000 order. The banker's acceptance carries a 1.4% commission per annum and payment is to be received in 6 months. If Jackson Inc. chooses to discount or sell the bankers acceptance to its bank, the discount rate is 1.00% per annum.
-Refer to Instruction 15.1. What is the size of the discount (not including the commission fee) Jackson must take for receiving the proceeds of the sale today rather than waiting for six months?

Question

Quizplus · Accepted Answer

The formula to calculate the discount is ((1.4/360) x 180 days) x $1,000,000 = $7,000. To calculate the discounted amount, we need to subtract the discount rate from the face value of the banker's acceptance: $1,000,000 - ($1,000,000 x 1.00% x 180/360) = $995,000. So, the discount is $5,000 ($1,000,000 - $995,000). Therefore, the best choice is B.

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