Gleim FAR 2014-2015

Question 1

Notes Receivable – Discounting

Answer 1

Discounting (selling) a note at a bank involves calculating the following:

1) Total interest receivable on the note (face amount × stated rate × note term)
2) Maturity amount (face amount + total interest receivable)
3) Accrued interest receivable (face amount × stated rate × note term elapsed)
4) Bank’s discount (maturity amount × bank’s discount rate × note term remaining)
5) Cash proceeds (maturity amount – bank’s discount)
6) Carrying amount of the note (face amount + accrued interest receivable)
7) Gain or loss (proceeds – carrying amount