Can anyone please help me?:confused:

1. Find the December 31 accrued interest on a $3,000, 60-day, 10% notes dated December 10.
(($3,000 x 10%) / 365) x 21 = $3,000 x 0.1 = $300
300 / 365 = 0.82
Accrued Interest: = 0.82 x 21 = $17.26


2. Find the December 31 accrued interest on a $4,200, 3-month, 11% notes dated December 2.
(($4,200 x 11%) / 365) x 29 = $4,200 x 0.11 = $462
462 / 365 = 1.27
Accrued Interest: = 1.27 x 29 = $36.83



On April 20 the business accepted the ABC Company's $1,080 note in payment of their account receivable balance. The note was at 8% for 60 days. [Assume a 360-day year in your calculations for interest amounts.]

3. If the note was discounted at the bank on May 5, how many days in the discount period?
April 20 to May 5 = 15dys 60dys – 15dys = 45dys


4. If the note was discounted at the bank on May 5 at 7%, what amount would be debited to the Cash account in the entry (the proceeds)?
0.07 * 1,080 * 45 / 360 = 9.45. Proceeds from bank would be 1,080 – 9.45 = $1,070.55


5. If the note was discounted at the bank on May 5 at 7%, what amount would be credited to the Interest Income account in the entry?
Amount to interest income would be 1080*.07* 15 / 360 = 3.15
The length of time the bank held the note was 15 days.


6. If the note was discounted at the bank on May 5 at 7%, what would be the discount amount?


7. The note was discounted at the bank on May 5 at 7% and the ABC Company defaulted on the payment. Since the business was contingently liable, how much would the business have to pay the bank if their protest fee was $25?

Your first two look good, Janelle... I'm getting similar results, save for a bit o' rounding:

3,000 x 0.10 / 365 x 21 = 17.26
4,200 x 0.11 / 365 x 29 = 36.71

For 3 - 7 it's helpful to start by determining exactly what the note will pay at maturity on Jun 19:

1,080 + (1,080 x .08 / 6) = 1,094.40. Of this amount, of course, $14.40 is interest.

The "discount period" in 3 is the interval from the day the bank "buys" the note for cash, to the day the bank collects the $1,094.40 when the note matures.

For 4 you'll determine what amount A the bank would be willing to pay for the note on May 5 such that when they collect the 1,094.40 45 days later, they've earned 7% on their investment; i.e.

A + (A x 0.07 / 360 x 45) = 1,094.40

In other words, solve that one for A.

For 5, remember that the note is accruing interest at 8% while in the company's hands, before being sold to the bank.

Nos. 6 and 7 will need to fielded by one of the accounting pros on here. I can envision a couple or three ways the discounting of the note might be booked with a JE. But with my luck, the preferred accounting method isn't any one of the ideas I have in mind :). Best of luck!

Thank you very much.

Just saying Hi. :-)

Hi morgaine300, can you please look over my questions, I still got all except no. 3 incorrect.

Sorry, I thought ArcSine had taken care of you. (I saw his post, you said thanks, and I never actually read anything.)

I would like to know first if you're supposed to be using 365 days rather than 360. I suspect most banks these days use 365 since there's no good reason not too, but most textbooks still use 360.

If you would do them like most people do, you would not be getting the rounding differences. #2 for instance: 4200 x .11 x 29/365 - done right in order gets you $36.71. You are rounding in the middle of the thing, and as a general rule I never round anything but the final answer. And if you do the "x 29" first, then the division, you can do this straight in order on your calculator without having to worry about rounding anything in the middle.

Ah, I just noticed right before #3 it says use 360.

I drew a little line to illustrate where the values fall at certain dates.

First you need to calculate the maturity value. ArcSine already did this as $1094.40. (1080 x .08 x 60/360) The difference of $14.40 is the interest you would have earned. However, you don't need that number to solve this. Also note that you will not be earning the $14.40 because you're not keeping the note until maturity.

What you have to keep in mind is that the bank is "buying" from you a note that will mature on 6/19 at $1094.40. So they are buying something worth $1094.40, not $1080. You are not borrowing $1080 from them. That number means nothing to the bank. They will get $1094.40 from the customer when it becomes due, so that's what they are buying.

They are going to have this note for 45 days. So on May 5 they are buying a note that will mature in 45 days at a maturity of $1094.40.

To "discount" a note means to bring it back to a smaller value. Forget this particular problem for a second. If you borrowed $1000 for a year at 10%, the interest would be $100. In a normal interest-bearing note, you get $1000 in cash now and have to pay back $1100 at maturity, the principal plus the interest. In a discounted note, you instead would take that $100 interest off the $1000 and the bank only gives you $900 to start with. So you get $900 (called the proceeds) and then you pay back $1000. Either way the interest is $100. The difference is that in the one case your get the full amount of the note and pay back EXTRA, and in the other case you pay back the face value but you don't get as much to start with.

So keep in mind what discounting is when you do this. The bank is buying something worth $1094.40 at maturity. So you're going to discount this back to May 5. It's like borrowing $1094.40 from them, but instead of being an interest-bearing note, it's a discounted note, the kind that goes backwards and you don't get as much. Do you see how the $1080 has nothing to do with this? You're not borrowing $1080 from the bank - but rather $1094.40 done as a discounted note.

So following my $1000 example above, how would you get the proceeds for this note, discounted at 7% for 45 days?

Once you have that done, now consider that you (not the bank) had an original note of $1080. This is what you have in your note receivable. That's what you lent a customer. The proceeds from #4 is what you're going to end up getting out of it. You're not getting $1094.40 anymore cause you took it to the bank. The proceeds the bank gave you from #4 is what you're getting. If you lent the customer $1080 and got the proceeds in #4, how much interest did you effectively get? You don't need to calculate anything using any rates. (I imagine that would be complicated. I don't even know how to do it that way.) Just think in terms of what you actual ended up getting versus the $1080 you lent to begin with.

#6 you should have from doing #4. You have to subtract that discount to get the proceeds. (In a discounted note, the "backwards interest" is called a discount. It's still charged to interest in the books.)

#7 - the bank was expecting to get $1094.40 at maturity. If they don't get it from the customer, they are going to get it from you, plus a fee of $25. So how much do you get to pay them?

Very nice exposition, Ms M! (And I dig the visual aid... the pic that's worth 1,000 words, as they say... )

Janelle, figuring out how much the bank will pay for that note on May 5 is key, since other answers spin off from that one. Morgaine's provided a nice explanation of what this 'discounting' process actually means. Also, you might get that "a-ha!" moment (you know, where the lightbulb clicks on) if you compare two different ways of setting up a loan.

In the more familiar method, you know how much you borrow, and you must then calculate how much you'll eventually pay back in total. For example, you borrow $1,000 today, with the agreement that you'll repay the loan, plus 9% interest, in 30 days. (Let's assume 360 days in a year, which lets us think of 30 days as just being one-twelfth of a year.) Easy enough... 9% on $1,000 for 30 days would be 1,000 x 0.09 / 12 = $7.50 interest. Hence, you'll give the bank $1,007.50 in 30 days to settle the loan. That's the amount borrowed, plus the interest on the amount borrowed.

But there's a second, less-familiar method of borrowing. In this case, you and the bank agree in advance on the amount to be repaid, then what's left is to calculate how much you'll borrow today. Seems kind of backwards, but it works, as you'll see next in our thrilling saga.

So suppose you and the bank agree that 30 days from now you will repay a total of $1,000. This includes the amount borrowed today, plus interest on that borrowed amount, at 9%. That leaves you and the bank with the task of figuring out just how much you'll be borrowing today.

It will be some amount (let's call it A for now), so that 30 days from today, the total of A , plus the interest on A , will equal the $1,000 that you've agreed to repay. Now it's easy to see the two methods in action, side-by-side.

In both cases, of course, the amount that's repaid at the end equals the amount borrowed, plus the interest on the amount borrowed. Thus the equation for the first borrowing method above is

1,000 + (1,000 x 0.09 / 12) = 1,007.50

But for the second method, we'll have to figure out what A is...

A + (A x 0.09 / 12) = 1,000.

You'll calculate that A, the amount borrowed today, is 992.56. Let's check: Interest on 992.56 for 30 days is (992.56 x .09 / 12) = 7.44. If you repay the 992.56 borrowed, plus 7.44 interest, you are repaying a total of 1,000; exactly as agreed.

Here's the important concept: Under this second method, the bank knows it will be receiving a total of 1,000 from you in 30 days. So it must figure out what amount (A) that it can loan you today, so that when it receives your 1,000 later, it's really getting back A, plus 9% interest on A.

If you've stuck with me so far, here's the payoff: Discounting a note is just like this second "loan" method I've illustrated above. In your particular case, the bank knows it'll be receiving 1,094.40 on Jun 19. What remains is to figure out just how much the bank will "loan" you on May 5 (some amount A), so that the 1,094.40 the bank receives on Jun 19 will represent A, plus 7% interest on A, for 45 days. Or in other words...

A + (A x 0.07 x 45 / 360) = 1,094.40

When you calculate A using that equation, that's the amount the bank will pay for that note on May 5.

Got to split, but adieu, and best of luck in your studies. You'll do fine.

Hi ArcSine & morgaine300 I carried the working with the explanation to my teacher and she's still is saying I am incorrect but she will not tell me how I am incorrect. So thank you all I believe I will have to go to school at: Ask Me Help Desk.

Is there a problem with (1) and (2)? If so, then maybe the instructor wants you to assume a 360-day year in those calcs as well?

If that is indeed the case, I'd certainly point out to the instructor that the 360-day day-count convention was explcitly given only for Questions 3 through 7.

Janelle, normally I can't haunt any one thread quite this long, but I guess this second mug of Starbucks Italian Roast has me uncharacteristically motivated this a.m. :). I remembered that there is an alternate method that some banks use in discounting a short-term loan; it produces a different result than the method I showed above, and if your book and/or instructor are assuming this method, I'd hate for my previous post to be the reason you were led astray.

This other method plays out like this: You stroll into the bank and ask to borrow $1,000 at 9% for 30 days (1/12 of a year). Mr. Banker dusts off his calculator and says, "Let's see...1,000 x 0.09 / 12...that's $7.50 interest. But here at First National, you pay the interest up front."

So he pays himself his $7.50 interest out of the $1,000 loan amount, and writes you a check for $992.50.

Of course, it's a silly little game that fools no one, but the method persists. Before you walk away with your freshly-signed check for $992.50, you tell him, "What's really going on here is that I'm actually borrowing 992.50 today, and repaying 992.50 + 7.50 = 1,000 in 30 days. Well, 7.50 interest on a 992.50 loan isn't 9%; the true effective rate you're charging me is 9.068%. We both know it...why don't we drop the corny charade and call it for what it is?" But I digress...

So it may be that your book wants you to compute the May 5 discount amount using this method. The 1,094.40 is what the bank will collect on Jun 19. On May 5, the banker would figure the interest on this amount at 7% for 45 days, deduct it from the Jun 19 amount, and write you a check for the difference.

Don't let all this frustrate you. It's very true that in accounting and finance there are a number of issues for which there exist two possible approaches; one you might call the 'technically precise' way, and the other being an acceptable shortcut. Now you've seen both. With the shortcut you gain simplicity at the cost of precision; but if the loss of precision isn't too great, that's when the shortcut can be called 'acceptable'. In this particular post I've described a common simplified method of discounting a note, and it might just be what the instructor is looking for.

This other method plays out like this: You stroll into the bank and ask to borrow $1,000 at 9% for 30 days (1/12 of a year). Mr. Banker dusts off his calculator and says, "Let's see...1,000 x 0.09 / 12...that's $7.50 interest. But here at First National, you pay the interest up front."

So he pays himself his $7.50 interest out of the $1,000 loan amount, and writes you a check for $992.50.

This is exactly how any accounting book I've ever seen would discount a note, which is what I described the first time. (I know you thought I was nuts, but I really wasn't. :D) It isn't the same as discounting something back to a present value. We do use that method when, say, purchasing something and have to pay $10,000 in 3 years and then discounting that back to today's value for the "something." Or for other types of long-term borrowings. But on a short-term note, or in a case like this when a receivable is discounted at the bank, it's done the "cheat" way as I described it.

Or at least, I've never seen any textbook do it any other way. At this level in a class, they would not likely have learned how to do the kind of discounting you're talking about yet.