Question

On July 1, Year 1, Kay Corp. sold equipment to Mando Co. for $100,000. Kay accepted a 10% note receivable for the entire sales price. This note is payable in two equal installments of $50,000 plus accrued interest on December 31, Year 1 and Year 2. On July 1, Year 2, Kay discounted the note at a bank at an interest rate of 12%. Kay's proceeds from the discounted note were:A. $48,400.B. $49,350.C. $50,350.D. $51,700.

Answer 1

Answer:

(D) $ 51,700

Explanation:

Given;

The amount for the first year = $ 50,000

The interest for the first year = 10%

thus,

the amount of interest paid = 0.1 × $ 50,000 = $ 5,000

Thus,

The amount received by the bank at the end of the first year will be

= $ 50000 + $ 5,000

= $ 55,000

Now,

for the second year, discounted rate = 12% per year

for up to July 1 = 6 months = discount rate = 12% × (6/12)

thus, total discount fee = $ 55,000 ×  12% × (6/12) = $ 3,300

Therefore,

Kay's proceeds from the discounted note were = $ 55,000 - $ 3,300

or

= $ 51,700

Hence, option (D) is the correct answer