Chapter 11, Problem 11.4EX

Chapter
Section
Textbook Problem

Evaluating alternative notesA borrower has two alternatives for a loan: (1) issue a $360,000, 60-day, 5% note or (2) issue a$360,000, 60-day note that the creditor discounts at 5%. a. Calculate the amount of the interest expense for each situation. b. Determine the proceeds received by the borrower in each situation. c. Which alternative is more favorable to the borrower? Explain.

A.

To determine

Notes Payable: Notes Payable is a written promise to pay a certain amount on a future date, with certain percentage of interest. Companies use to issue notes payable to meet short-term financing needs.

To calculate: The amount of interest expense for each option.

Explanation

Calculate the amount of interest expense for Alternative 1.

Interest Expense = Note Payable×Interest Rate×Interettimeperiods                          = $360,000×5%×60360 =$3,000

Calculate the amount of interest expense for Alternative 2

B.

To determine
The proceeds amount received by borrower in each Alternative.

C.

To determine

To Choose: The more favorable Alternative to the borrower.

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