In: Accounting
1. On January 1, Panther Corporation received one-year 12% note receivable with a face value of P100,000 from one of its customers. On October 1, Panther Corporation discounted the note to Peaceful Bank to meet some of its maturing obligations. The bank’s rate in discounting the note is 14%. How much is the proceeds from discounting of notes receivable?
2. Wednesday Company received from a customer a one-year, P 500,000 note bearing annual interest of 8%. Five months prior to maturity, Wednesday discounted the note at IABF Bank at 10%. Give the entry for the discounting, assuming the note was discounted with recourse and is accounted as a conditional sale. Round off to the nearest whole number.
Discounting Notes recievable | |||
Part 1 | |||
Computation of maturity value | |||
Face value | 100000 | ||
Interest @ 12% | 12000 | ||
Maturity value | 112000 | ||
Computation of Discount | |||
.14 * 112000 * 3/12 = 3920 | |||
Computation of proceeds | |||
Maturity value | 112000 | ||
Discount | 3920 | ||
Proceeds | 108080 | ||
Interest Revenue Earned | |||
100000 * .12 * 9/12 | 9000 | ||
Computation of Net Interest Expense | |||
Face Value + Interst earned | 109000 | ||
Discount proceeds | 108080 | ||
Interest expense | 920 | ||
Journal Entry | |||
Cash A/c Dr | 108080 | ||
Interest expense A/c Dr | 920 | ||
To Notes Recievable | 100000 | ||
To Interest income | 9000 | ||
Part 2 | |||
Computation of maturity value | |||
Face value | 500000 | ||
Interest @ 8% | 40000 | ||
Maturity value | 540000 | ||
Computation of Discount | |||
.10 * 540000 * 5/12 = | 22500 | ||
Computation of proceeds | |||
Maturity value | 540000 | ||
Discount | 22500 | ||
Proceeds | 517500 | ||
Interest Revenue Earned | |||
500000 * .08 * 7/12 | 23333 | ||
Computation of Net Interest Expense | |||
Face Value + Interst earned | 523333 | ||
Discount proceeds | 517500 | ||
Interest expense | 5833 | ||
Journal Entry | |||
Cash A/c Dr | 517500 | ||
Interest expense A/c Dr | 5833 | ||
To Notes Recievable | 500000 | ||
To Interest income | 23333 | ||
A contingent liability will be shown as follows: | |||
A note is worth P 540000 is discounted with bank with recourse. | |||