[jruebush]

10/30/07 Borrowed $24,000, 12-Month Note Payable at 16% Annual Rate.

What is my Discount On Notes Payable?

This is what I have tried:
1) 24,000*.16=3840
2) 24,000*.16*12/360=128

I think the 12 month note is throwing me off. If it was a 90 day note its would be 24,000*.16*90/360 but this is not the case.

Can someone help me understand this?

[ArcSine]

Could this be referring to a 'discounted' note? The background material in your text should indicate if this is the case.

If so, the general idea is that the borrower is obligated to repay exactly 24k in one year. This amount is deemed to be comprised of both the actual principal borrowed, plus the interest on said principal at 16%.

Thus, when a borrowing is structured as a 'discounted' note, it's the final amount due which is fixed in advance, and the principal amount is implied by the interest rate.

Call the principal borrowed P. What you know is that the repayment of 24k consists of P, plus 16% of P; or...

1.16P = 24,000

Solving for P indicates that 20,689.66 is the principal actually borrowed. After one year the borrower owes 20,689.66 plus one year's interest on that amount at 16%.

Do that math and you'll see that the borrower owes exactly 24,000 in principal plus interest.

That's the basic mechanics of a 'discounted' note, and in this case the 'discount' is 3,310.34, which is also the implied interest on the debt.

Nevertheless, check your background material carefully. Terminology does vary, and something else may be intended by your text's question.