EXERCISES ON DISCOUNTING OF NOTES

I. DISCOUNTING OF NOTES RECEIVABLE

1. Determination of Interest and Maturity Date (use 360 days for interest)

Date of Note Principal Rate Term Maturity Date Interest

A 8/5/2021 ₱60,000.00 12% 80 10/24/2021 1,600.00
B 5/10/2021 84,000.00 16% 90
C 10/1/2020 120,000.00 18% 45
D 7/1/2021 45,000.00 14% 60
E 9/15/2021 90,000.00 17% 75

2. Determination of Interest and Maturity Value (use 360 days for interest)
Additional assumptions:
Principal Rate Term Interest Maturity Value Date of Note
A ₱540,000.00 11.90% 2 years 128,520.00 ₱668,520.00 8/5/2021
B 337,500.00 8.40% 10 months ₱337,500.00 8/6/2021
C 1,250,000.00 12.50% 5 months 65,104.17 ₱1,315,104.17 10/20/2021
D 910,000.00 9.25% 2.5 years ₱910,000.00 8/8/2021
E 750,000.00 14% 45 days 13,125.00 ₱763,125.00 8/9/2021

3. Determination of Maturity Date and Maturity Value, Discount Period Net proceeds, and Gain/Loss on Discounting (use 360

Principal Interest Rate Date of NoteTerm Maturity Date Interest

(days)
A ₱40,000.00 10.40% 12/12/2021 50 1/31/2022 577.78
B 55,000.00 13.50% 6/17/2021 69
C 25,000.00 12% Mar-04 70 days
D 6,000,000.00 10.00% 6/7/2021 90 9/5/2021 150,000.00
E 15,000.00 15% May-13 80 days

Date of Discount Discount Discount Net Proceeds

Discounting Period Rate 19
A 1/19/2022 12 15% ₱202.89 ₱40,374.89 19
B 7/22/2021 13.70%
C 4/1/2015 13%
D 7/31/2021 36 12.00% 73,800.00 6,076,200.00
E Jul-09 17%
38

Net Proceeds Principal Accrued Carrying Gain/(Loss) on

Interest Amount Discounting
A ₱40,374.89 40,000.00 ₱439.11 ₱40,439.11 (₱64.22)
B - 55,000.00
C - 25,000.00
D 6,076,200.00 6,000,000.00 90,000.00 6,090,000.00 (13,800.00)
E - 15000
₱0.00 ₱0.00

II. DISCOUNTING OWN NOTE (use 360 days for interest) (NOTES PAYABLE)

Principal Discount Rate Term Discount / PrepaiNet Proceeds

A ₱100,000.00 12% 60 days
B 150,000.00 10.50% 45 days 1,969.00 148,031.00
C 60,000.00 7.50% 1 year
D 80,000.00 4% 6 months 1,600.00 78,400.00
E 200,000.00 15% 1.5 years 45,000.00 155,000.00
 Interest (I)= Principal (P) x Rate (R) x Time or Term (T)
P = I / RT
R = I / PT

T = (I / PR) x 360 (if # of days; x12 if in months)

nal assumptions:
Maturity Date Maturity Value (MV) = Interest (I) + Principal (P)
8/5/2023 I = MV - P

3/20/2022 P = MV - I

9/23/2021

ss on Discounting (use 360 days for interest)

Maturity Value Date of Discount Discount Discount Net Proceeds

Discounting Period Rate
₱40,577.78 1/19/2022 12 15.00% ₱202.89 ₱40,374.89
7/22/2021 0 13.70% ₱0.00 ₱0.00
Apr-15 0 13.00% ₱0.00 ₱0.00
6,150,000.00 7/31/2021 36 12.00% ₱73,800.00 ₱6,076,200.00
0 17% ₱0.00 ₱0.00 ₱0.00

Sample computation of discount & accrual period: Discount (D) = Maturity Value (MV) x Discount Rate (DR) x D
Dec 19 MV = D / (DR x DP)
Jan 31 50 days DR = D / (MV x DP)
Discount period 12 DP = D / ((MV x DR) x 360)

Accrual period 38 (Term of Note - Disct Period)

38

Accrued Interest (AI) =

Date of note Disct Date Maturity Date
12-Dec 19-Jan 31-Jan Carrying Amount (CA) =
ACCRUAL PERIOD DISCOUNT PERIOD
 38 12 Gain (Loss) on Discounting =

50
Term of Note

Discount (d) = Principal (P) x Discount Rate (DR) x Term (T)

 JOURNAL ENTRIES:
1. When business entity receiv
Notes Receivable
Sales
To record sales in exchange for

Aug 22
Sep 23 2. Upon collection from custom

Cash
Notes Receivable
Interest Income

Accrued Carrying Gain/(Loss) on

Interest Amount Discounting 6/7/2021
₱439.11 ₱40,439.11 (₱64.22)
₱0.00 ₱0.00 ₱0.00
₱0.00 ₱0.00 ₱0.00
₱90,000.00 ₱6,090,000.00 (₱13,800.00)
₱0.00 ₱0.00

7/31/2021
y Value (MV) x Discount Rate (DR) x Discount Period (DP)

V x DR) x 360)

9/5/2021
Accrued Interest (AI) = Principal (P) x Interest Rate (R) x Accrual Period (AP)

Carrying Amount (CA) = Principal (P) + Accrued Interest (AI)

Gain (Loss) on Discounting = Net proceeds (NP) - Carrying Amount (CA)

9/5/2021

9/5/2021

1/1/2021

12/31/2021

6/30/2022
RNAL ENTRIES:
When business entity receives a promissory note for a sale transaction. (Case B)
es Receivable 40,000.00
40,000.00
ecord sales in exchange for promissory note

Upon collection from customer on the maturity date:

₱40,577.78
Notes Receivable ₱40,000.00
nterest Income 577.78

#3-D: PN WAS DISCOUNTED WITH RECOURSE

Entry upon receipt of promissory note on 6/7/21, as settlement of an open account
Notes Receivable 6,000,000.00
Account Receivable 6,000,000.00

To record receipt of promissory note in settlement of AR

Cash 6,076,200.00
Loss on Discounting NR 13,800.00
Notes Receivable Discounted 6,000,000.00 presented as Contra-Notes Receivable Acct
Interest Income 90,000.00

To record discounting of promissory note - with recourse

6,090,000.00 6,090,000.00
The customer defaulted (or dishonored) on settlement of promissory note
Notes Receivable Discounted 6,000,000.00
Accounts Receivable 6,150,000.00
Cash 6,150,000.00 (maturity value of the note, because this is what the bank
Notes Receivable 6,000,000.00
The customer paid or honored the maturity of promissory note
Notes Receivable Discounted 6,000,000.00
Notes Receivable 6,000,000.00

Assuming that the note was not discounted, and the customer honored the maturity of the promissory note:
Cash 6,150,000.00
Notes Receivable 6,000,000.00
Interest Income 150,000.00

Entry for NP discounting:

Case E
Cash 155,000.00
Prepaid Interest 45,000.00
Notes Payable 200,000.00

Interest Expense 30,000.00

Prepaid Interest 30,000.00

Upon payment:
Notes Payable 200,000.00
Cash 200,000.00

Interest Expense 15,000.00

Prepaid Interest 15,000.00

ALTERNATIVELY, IF NOTE WAS NOT DISCOUNTED:

Cash 200,000.00
Notes Payable 200,000.00

UPON PAYMENT:
Notes Payable 200,000.00
Interest Expense 45,000.00
Cash 245,000.00
 #3-D: PN DISCOUNTED WITHOUT RECOURSE
Entry upon receipt of promissory note on 6/7/21
6/7/2021 Notes Receivable 6,000,000.00
Account Receivable 6,000,000.00

To record receipt of promissory note in settlement of AR

7/31/2021 Cash 6,076,200.00

Notes Receivable Acct Loss on Discounting NR 13,800.00
Notes Receivable 6,000,000.00
Interest Income 90,000.00

To record discounting of promissory note - without recourse

9/5/2021 The customer defaulted (or dishonored) on settlement of promissory note

NO ENTRY - the bank takes the necessary course of action against the maker
e note, because this is what the bank expects to collect)
 9/5/2021 The customer paid or honored the maturity of promissory note
NO ENTRY - the Notes Receivable account was already closed upon discounting

he promissory note:
 D:
Maturity Date: Aug 26 JUNE
Sept 30 56 JULY
Oct 24 24 AUG

80 SEPT
TERM

Aug 22 SEPT
Sept 23 23 AUG

Term 45 days DISCT PERIOD

JULY
JUNE
ACCRUAL PRD
TERM OF NOTE

Dec 19
Jan 31 31

Term 50

Jan 12 discount period

 23
31 67
31 36

5 5
90

5
31

36

31
23
54
90