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

Answer: $3,756.50

Step-by-step explanation:

The Discount on Note Payable is used to record the interest charge on a note that is already included in the maturity value of the note. It is based on the present value of the loan and the prevailing interest rate.

= Present value of the loan for three years * Prevailing interest rate

= 37,565 * 10%

= $3,756.50