On June 1, 2013, Dirty Harry Co. borrowed cash by issuing a 6-month noninterest-bearing note with a maturity value of $500,000 and a discount rate of 6%. Assuming straight-line amortization of the discount, what is the carrying value of the note as of September 30, 2013?

Question

Quizplus · Accepted Answer

The discount on the note is calculated as follows:
Discount = Maturity Value x Discount Rate x Time
where Time is the fraction of the discount period that has elapsed. For this note, the discount is:

Discount = $500,000 x 6% x (4/12) = $10,000

The carrying value of the note as of September 30, 2013, is the difference between the maturity value and the discount, which is:

Carrying Value = $500,000 - $10,000 = $490,000

However, because the discount was amortized using straight-line amortization, the discount for each month is $1,667 ($10,000 ÷ 6). Therefore, as of September 30, 2013, three months have elapsed, and the discount that has been amortized is $1,667 x 3 = $5,001.

Thus, the carrying value of the note as of September 30, 2013, is:

Carrying Value = $500,000 - ($10,000 - $5,001) = $495,001

Therefore, the best choice is C.