Question

On January 1, 2018, Ann Stine loaned $37,565 to Joe Grant. A zero-interest-bearing note (face amount, $50,000) was exchanged solely for cash. The note is to be repaid on December 31, 2020. The prevailing rate of interest for a loan of this type is 10%. The present value of $50,000 at 10% for three years is $37,565. What amount of the Discounts on Notes Payable should Mr. Grant credit in 2018?

Answer 1

Ans:

Loan Value : $37,565

Note Amount : $50,000

Prevailing interest rate : 10%

Present value of note : $37,565

Life of Note : 3 Years.

Total discount on note payable : $50,000 - $37,565 = $12,435, which should be amortised over the life of note.

So amount of the Discounts on Notes Payable Mr. Grant should credit in 2018 will be :

Present value of Note Payable * prevailing interest rate

= 37,565*10% = $3,756.50

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