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19 May, 04:51

Ireland Corporation obtained a $40,000 note receivable from a customer on June 30, 2011. The note, along with interest at 6%, is due on June 30, 2012. On September 30, 2011, Ireland discounted the note at Cloverdale bank. The bank's discount rate is 10%. What amount of cash did Ireland receive from Cloverdale Bank?

A. $39,220

B. $40,600

C. $36,000

D. $36,820

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Answers (1)
  1. 19 May, 05:01
    0
    Option (A) is correct.

    Explanation:

    The maturity value of the note receivable on June 30, 2012

    = Principal + Interest

    = $40,000 + $40,000 * 6%

    = $ 42,400

    The note is discounted on September 30, 2011.

    Time period remaining to go till maturity as on September 30, 2011:

    = 12 - 3 months (July, Aug and Sep)

    = 9 months.

    Bank will calculate the present value of amount receivable 9 months from September 30, 2011 at bank's discount rate which is the required rate of return by the bank.

    Amount of deduction:

    = $ 42,400 * 10% * 9/12

    = $ 3,180

    So, Cash received by Ireland:

    = Maturity value - Discount

    = $ 42,400 - $ 3,180

    = $39,220
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Home » Business » Ireland Corporation obtained a $40,000 note receivable from a customer on June 30, 2011. The note, along with interest at 6%, is due on June 30, 2012. On September 30, 2011, Ireland discounted the note at Cloverdale bank.
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