Question

On July 1, 2005, Lee Co. sold goods in exchange for a $200,000, 8-month, noninterest-bearing note receivable. At the time of the sale, the note's market rate of interest was 12%.

What amount did Lee receive when it discounted the note at 10% on September 1, 2005?

A. $194,000
B. $193,800
C. $190,000
D. $188,000

Answer 1

Option (C) $190,000

Step-by-step explanation:

Data provided in the question:

Amount of the goods sold in exchange = $200,000

Note's market rate of interest at the time of sale = 12%

Discount note on September 1, 2005 = 10%

Now,

since the note is non-interest bearing.

As of September 1, 2005, 2 months have elapsed since the original issuance of the note on On July 1, 2005

Thus,

Only 6 months are remaining of the 8 month term.

Therefore,

Discount = $200,000 × 10% × 0.5 [ as 6 months = 0.5 year]

= $10,000

Therefore,

Proceeds from the discounting = $200,000 - $10,000

= $190,000.

hence,

Option (C) $190,000