22. Assume that united company accepts 60 days 7% note of $600 dated Apirl 17, from national company in settlement of the past-due account. On march 2, united company has discounted the note at dashen bank at 8%. The maturity date of the note is June 16. On may 2, the united company decided to discount national company note at the bank at stated rate.
A. Determine the maturity value of the note.
B. Determine the number of days in the discount period.
C. Determine the bank discount.
D. Determine the proceeds.
E. Present the entry, in general journal form, to record the discounting of the note on may.
A. The maturity value of the note can be calculated using the following formula:
Maturity Value = Principal + (Principal * Interest Rate * Time)
Principal = $600
Interest Rate = 7% = 0.07
Time = 60 days / 365 days (assuming a 365-day year)
Maturity Value = $600 + ($600 * 0.07 * (60/365))
Maturity Value = $600 + ($252/365)
Maturity Value = $600 + $0.69
Therefore, the maturity value of the note is $600.69.
B. The number of days in the discount period can be calculated by subtracting the discount date (March 2) from the maturity date (June 16):
Number of days in the discount period = June 16 - March 2
Number of days in the discount period = 106 days
C. The bank discount can be calculated using the formula:
Bank Discount = Maturity Value * Discount Rate * Time
Maturity Value = $600.69 (from part A)
Discount Rate = 8% = 0.08
Time = Number of days in the discount period / 360 days (assuming a 360-day year)
Bank Discount = $600.69 * 0.08 * (106/360)
Bank Discount = $600.69 * 0.08 * 0.294
Bank Discount = $14.72
Therefore, the bank discount is $14.72.
D. The proceeds can be calculated by subtracting the bank discount from the maturity value:
Proceeds = Maturity Value - Bank Discount
Proceeds = $600.69 - $14.72
Proceeds = $585.97
Therefore, the proceeds are $585.97.
E. The entry in the general journal form to record the discounting of the note on May 2 would be:
Date: May 2
Account Debit: Cash - $585.97
Account Credit: Notes Payable - $600.69 (Principal amount of the note)
Account Credit: Discount on Notes Payable - $14.72 (Bank discount)
Account Credit: Interest Expense - $0.97 (Interest calculated as ($600.69 - $585.97))
This entry records the receipt of cash ($585.97) from the bank for the discounted note, as well as the reduction of Notes Payable and the recognition of the bank discount and interest expense.