On June 1, 2005, Yola Corp.

loaned Dale $500,000 on a 12% note, payable in five

annual installments of $100,000 beginning January 2, 2006. In connection with this
loan, Dale was required to deposit $5,000 in a noninterest-bearing escrow account.

The amount held in escrow is to be returned to Dale after all principal and interest
payments have been made. Interest on the note is payable on the first day of each
month beginning July 1, 2005. Dale made timely payments through November 1,
2005. On January 2, 2006, Yola received payment of the first principal installment
plus all interest due.

On December 31, 2005, Yola's interest receivable on the loan to Dale should be

a) $0
b) $5,000
c) $10,000
d) $15,000

c) $10,000

Because the last interest payment was made on November 1, the interest for
November and December is unpaid as of December 31, 2005. Therefore, two months
of interest is receivable, as of December 31, 2005, for a total receivable of $10,000 =
(2/12)(12%)($500,000). No principal payments have yet been made as of this date.

7
On December 30, 2005, Chang Co. sold a machine to Door Co. in exchange for a
noninterest-bearing note requiring ten annual payments of $10,000. Door made the
first payment on December 30, 2005. The market interest rate for similar notes at the
date of issuance was 8%. Information on present value factors is as follows:

Period PV of $1 at 8% PV of ord annuity of $1 at 8%

9 0.50 6.25
10 0.46 6.71
In its December 31, 2005, balance sheet, what amount should Chang report as note
receivable?

a) $45,000
b) $46,000
c) $62,500
d) $67,100

c) $62,500

The note receivable should be reported at the present value of the nine remaining
payments. The first payment was made at the date of the sale. The remaining nine
payments comprise an ordinary annuity as of December 31, 2005 because the next
payment is due one year from that date.

Therefore, the present value and reported note value on that date is 6.25($10,000) =
$62,500.

8
On December 31, 1999, Key Co. received two $10,000 noninterest-bearing notes from
customers in exchange for services rendered. The note from Alpha Co., which is due
in nine months, was made under customary trade terms, but the note from Omega Co.,
which is due in two years, was not. The market interest rate for both notes at the date
of issuance is 8%. The present value of $1 due in nine months at 8% is .944. The
present value of $1 due in two years at 8% is .857. At what amounts should these two
notes receivable be reported in Key's December 31, 1999, balance sheet?

Alpha Omega
a) $ 9,440 $ 8,570
b) $10,000 $ 8,570
c) $ 9,440 $10,000
d) $10,000 $10,000
b) $10,000 $ 8,570

The note from Alpha Co. is a short-term asset. It is reported at the face value of
$10,000. The note from Omega is discounted as a single sum for two time periods at
8% to be reported at $10,000X.857=$8,570.

9
After being held for 40 days, a 120-day, 12% interest-bearing note receivable was
discounted at a bank at 15%. The proceeds received from the bank equal

a) Maturity value less the discount at 12%.

b) Maturity value less the discount at 15%.
c) Face value less the discount at 12%.
d) Face value less the discount at 15%.

b) Maturity value less the discount at 15%.

The bank charges its discount (its fee) on the maturity value, which is the face value
of the note plus 12% interest for 120 days. The bank charges 15% on this amount for
the 80 remaining days in the note term. Thus, the proceeds equal the maturity value
less its fee.

10
Ace Co. sold King Co. a $20,000, 8%, 5-year note that required five equal annual
year-end payments. This note was discounted to yield a 9% rate to King. The present
value factors of an ordinary annuity of $1 for five periods are as follows:

8% 3.992
9% 3.890
What should be the total interest revenue earned by King on this note?

a) $9,000
b) $8,000
c) $5,560
d) $5,050

c) $5,560

Total interest over the life of the note equals the total amount paid by Ace over the life
of the note less the proceeds to Ace. The proceeds equal the present value of the
payments at the 9% yield rate. The annual payment is found using the 8% rate because
that rate is contractually set and determines the annual payment.

The annual payment P is found as: $20,000 = P(3.992). P = $5,010

Total interest revenue = total payments by Ace - proceeds to Ace

= 5($5,010) − $5,010(3.89) = $5,560.

11
Roth, Inc. received from a customer a one-year, $500,000 note bearing annual interest
of 8%. After holding the note for six months, Roth discounted the note at Regional
Bank at an effective interest rate of 10%. What amount of cash did Roth receive from
the bank?

a) $540,000
b) $523,810
c) $513,000
d) $495,238

c) $513,000

Maturity value of the note: $500,000(1.08) $540,000

Less discount to the bank: $540,000(.10)(6/12) (27,000)
Equals proceeds to Roth $513,000

The bank charges its discount on the maturity amount, for the period it holds the note.
In effect, it is charging interest on interest yet to accrue (for the last six months). This
procedure is followed because the maturity value is the amount at risk.

12
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

c) $190,000

Six months remain in the note term at the date of discounting.

Maturity value of note: $200,000

Less discount: $200,000(.10)(6/12) (10,000)
Equals proceeds on note $190,000