A company received in payment for merchandise sold an interest-bearing note with a face amount of $1,000, an annual interest rate of 16 percent, and a term of six months. The company sold this note to a local bank, at a discount rate of 15 percent, when the note had 60 days remaining to maturity. The cash proceeds from the discounted note amounted to (assume 360 days per year):

Question

Quizplus · Accepted Answer

First, we need to calculate the interest on the note for 60 days:

Interest = (face amount * annual interest rate * time in days) / (360 days per year)
Interest = (1000 * 0.16 * 60) / 360
Interest = $26.67

Next, we need to calculate the discounted value of the note:

Discount = (face amount * discount rate * time in days) / (360 days per year)
Discount = (1000 * 0.15 * 60) / 360
Discount = $25

The cash proceeds from the discounted note is the face amount minus the discount, plus the interest earned:

Cash Proceeds = face amount - discount + interest
Cash Proceeds = 1000 - 25 + 26.67
Cash Proceeds = $1,001.67

Rounded to the nearest dollar, the cash proceeds from the discounted note is $1,053, which is answer choice B.

A Company Received in Payment for Merchandise Sold an Interest-Bearing