Question

Frank Builds a contractor, agrees to build a garage for Sarah. In return, Sarah will pay him $15,000. Most of his materials for his construction jobs from the Lumber Supply Store. He has an account with them, meaning the Store lets him buy materials on credit. Frank typically pays on his account once per month. During the time Frank was building the garage for Sarah, his monthly payment to the Lumber Supply Store became due. However, he didn't have any cash on hand.

Scenario #1 -- If Frank had a $15,000 promissory note from Sarah, how could he use it to pay the Supply Store?
A) Show the note to the Store
B) Use the note as cash
C) Exchange the note for materials
D) Deposit the note in the bank

Answer 1

Frank could potentially use the promissory note as collateral to secure credit or sell/assign the note to another party who would pay him immediately, providing funds to settle his account with the Lumber Supply Store. Deposit in the bank could also be possible, depending on the bank's policies.

Step-by-step explanation:

Frank Builds a contractor, who agrees to build a garage for Sarah in return for a payment of $15,000, has several options on how he could use a $15,000 promissory note from Sarah to pay the Supply Store. A promissory note is a financial instrument that indicates that the person named in the note promises to pay a certain sum to a specified person or the bearer at a specified date or on-demand. Therefore, Frank could not use the note as cash directly since it is not legal tender.

However, Frank could potentially use the promissory note as collateral to secure credit with the Lumber Supply Store or another financial institution. An alternative could be selling or assigning the note, which would mean another party buys the note from Frank at a discount, providing him with immediate funds he could then use to settle accounts, including the one with the Lumber Supply Store. Lastly, depositing the note in the bank could also be an option if the bank agrees to credit the value of the note to Frank's account against future receipt of funds from Sarah. It's important to note that each of these options requires agreement from the parties involved and may involve credit risk considerations.