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13 December, 07:06

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

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Answers (1)
  1. 13 December, 07:50
    0
    Option (C) $190,000

    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
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