DISCOUNTING NOTES

Problem #1
Madlie Company provided the following transaction:
On January 1, the entity sold merchandise for 500,000 accepting a note of 500,000 for six (6)
months with interest to be paid at maturity at 12%.
On March 1, the entity discounted the note without recourse at the local bank at 15%.
On July 1, the customer paid the bank in full.
Prepare the entries.
Answer:
January 1
Notes Receivable 500,000
Sales 500,0000
March 1
Cash 503,500
Loss on NR Discounting 6,500
Notes Receivable 500,000
Interest Income 10,000
Solution:

FORMAT:
Principal
+ Total Interest
Maturity value
- Discount
Net proceeds
- Carrying amount

 TOTAL INTEREST Gain or Loss on NR Discounting

Face value or Principal x Notes rate x Total period

= 500,000 x 12% x 6/12
= 30,000

 MATURITY VALUE
Face value or Principal + Total interest
=500,000 + 30,000
=530,000

 DISCOUNT
Maturity value x Discount rate x Discount period
=530,000 x 15% x 4/12
=26,500
  NET PROCEEDS
Maturity value - Discount
=530,000 - 26,500
=503,500

 CARRYING AMOUNT
Face value or Principal + (Face value x Notes rate x Accrued period)
= 500,000 + (500,000 x 12% x 2/12)
=510,000

 LOSS ON NR DISCOUNTING
Net proceeds - Carrying amount
=503,500 - 510,000
=(6,500)

 INTEREST INCOME
Face value or Principal x Notes /interest rate x Accrued period
=500,000 x 12% x 2/12
=10,000

July 1
NO ENTRY SINCE IT IS WITHOUT RECOURSE (HINDI NA OBLIGATED ANG
ENTITY KUNG MAG BAYAD ANG CUSTOMER OR HINDI)

Problem #2
A 2,400,000, 6-month, 12% noted July 1 is received from a customer by an entity and
discounted by the Bank Ko on August 1 at 15%.
Prepare the entries.
July 1
Notes Receivable 2,400,000
Sales 2,400,000
August 1
Cash
On NR Discounting
Notes Receivable
Interest Income