Question

Ireland Corporation obtained a $40,000 note receivable from a customer on June 30, 2011. The note, along with interest at 6%, is due on June 30, 2012. On September 30, 2011, Ireland discounted the note at Cloverdale bank. The bank's discount rate is 10%. What amount of cash did Ireland receive from Cloverdale Bank?

A. $39,220
B. $40,600
C. $36,000
D. $36,820

Answer 1

Answer:

Option (A) is correct.

Explanation:

The maturity value of the note receivable on June 30, 2012

= Principal + Interest

= $40,000 + $40,000 × 6%

= $ 42,400

The note is discounted on September 30, 2011.

Time period remaining to go till maturity as on September 30, 2011:

= 12 - 3 months ( July, Aug and Sep)

= 9 months.

Bank will calculate the present value of amount receivable 9 months from September 30, 2011 at bank's discount rate which is the required rate of return by the bank.

Amount of deduction :

= $ 42,400 × 10% × 9/12

= $ 3,180

So, Cash received by Ireland :

= Maturity value - Discount

= $ 42,400 - $ 3,180

= $39,220