Discounting of Notes(3) PDF

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ACTG101–HANDOUTSFI NALS–TRANSACTI ONSI NCLUDI NG NOTES Defini t i onofTer ms *Not esr ec ei vabl e–c l ai mssuppor t edbyf or malpr omi sest opayus ual l yi nt hef or m of not e s *Ne got i abl epr omi ssorynot es–anuncondi t i onalpr omi sei nwr i t i ngmadebyone per sont oanot her ,si gnedbyt hemaker ,eng agi ngt opayondemandoratafixed det er mi nabl ef ut ur et i measum c er t ai ni nmone yort obear er . *Di shonor ednot es–whenpr omi ss orynot emat ur esandi snotpai d.Thi sshoul dbe r emovedf r om t henot e sr ecei vabl eaccountandt r ansf er r edt oaccount sr e ce i v abl eatan amounti nc l udi ng,i fany ,i nt e r es tandot herchar ges . *Di sc ount i ngofNo t es–t hepay eemayobt ai ncashbef or emat ur i t ydat eatabankor ot herfinanci ngcompany .Thepay eet henbec omest heendor ser ;t hebankorot her financ i ngc ompanybecome st heendor see. Sampl ePr omi ssor yNot e P100,000 1, 2009

Dasma, Cavite

May

90 days after date, I promise to pay to the order of Charmcharm, One Hundred Thousand and xx/100 pesos For value received with simple interest at 12% per annum. Due July 30 2009

JaeyRa Jo

El ement soft heNot es *Maker–JaeyRaJo *Pay ee–Char mc har m *Pr i nci pal( Fac e)–P100, 000.I ti st heamountappe ar i ngont hef aceoft henot e .I t r epr esent st heamountbor r owed *I nt er es tRat e–12%.Annuali nt e r es tr at eofi nt e r es tappear i ngont hef ac eoft henot e whi c hwi l lbet hebasi sofi nt er es tc har ge st ot hemaker .I ti susual l yst at edatanannual r at e *I nt er es t-amountofi nt er es tf ort hef ul lt er m oft henot e I nt er e st( I )=Pr i nci palxRat exTi me( PxRxT) I nt er e st( I )=P100, 000x12% x90/360 =P3, 000 *Ter m –90days.I ti st heper i odoft i medur i ngwhi chi nt er estshoul dbec omput ed.I t ext endsf r om t hei ssuedat et ot hemat ur i t ydat eoft henot e *I ssueDat e–May1,2009.I ti st hedat ewhent henot ewassi gnedandi ss ue d *Mat ur i t yDat e–Jul y30,2009.I ti st hedat ewhenmat ur i t yval ueshoul dbepai dand i scomput edasf ol l ows: Daysr emai ni ngi nMay( 31–1) Daysi nJune Daysf orJul y Ter m ofNot e

30 30 30( mat ur i t ydat e ) 90

*Mat ur i t yVal ue–amountdueont henot eatt hedat eofmat ur i t y Mat ur i t yVal ue( MV)=Pr i nci palpl usI nt er es t( P+I ) Mat ur i t yVal ue( MV)=P100, 000+P3, 000

=P103, 000 Jour nalEnt r i es May1 Not e sRece i vabl e Cash Tor ec or dr ec ei ptof90daynot e.

P100, 000 P100, 000

31 I nt er es tRec ei vabl e I nt er es tI ncome( 100, 000x12% x30/360) Tor ec or dac cr uedi nt er e st .

1, 000

June30 I nt er es tRecei vabl e I nt er es tI ncome( 100, 000x12% x30/360) Tor ec or dac c r uedi nt er est .

1, 000

Jul y30 I nt er e stRec ei vabl e I nt er es tI ncome( 100, 000x12% x30/360) Tor ec or dac c r uedi nt er est .

1, 000

Cash

1, 000

1, 000

1, 000

103, 000

Not e sRecei vabl e I nt er es tRec ei vabl e Tor ec or dc ol l ec t i onofNot espl usi nt er est

100, 000 3, 000

Assume that the maker dishonored the note on July 30. The maker is still liable to pay the maturity value including protest fees and charges that may accrue after maturity date. Jul y30 Account sRe cei v abl e Not e sRecei vabl e I nt er es tRec ei vabl e Tor ec or dNot esr ec ei vabl edi shonor ed

P103, 000 P100, 000 3, 000

DI SCOUNTI NG OFNOTES -Thepaye emayobt ai ncashbef or emat ur i t ydat eatabankorot herfinanci ngcompany . Thepaye et henbecomest heendor ser ;t hebankorot herfinanci ngcompanybecomes t heendor see.I ti saconveni entwayf orabusi ne ssori ndi vi dualt ocashi nonanot eat anyt i mebef or emat uri t y . -Whe nanot ei sdi s count ed,t heor i gi nalpay eer ecei vest hepr oc eedsoft hedi scount ed not e .Thebank–ne w payee–wi l lr ec ei vet hemat uri t yval ueoft henot eatmat ur i t y .To r ec ei v ecashont henot ebef or emat ur i t y ,t hesel l eri swi l l i ngt oacce ptasi gni ficant l y di scount edpr i ce . -Not e sar egener al l ydi scount edwi t hr ecour se.Thi smeanst hatt heent i t ydi sc ount i ng t henot eguar ant eespaymenti ft hemakeroft henot edef aul t sordi shonor spayment . Ent ryf orNot e sDi scount edwi t hr ecour se( i ft hepr obl em i ssi l ent ) Cash xxx Not e sRece i vabl eDi scount e d xxx Ent ryf orNot e sDi scount edwi t houtr ecour se Cash xxx Not e sRece i vabl e xxx

Ter msRel at edt oDi scount i ng *Ne tPr oce eds–r e f ert ot hedi scount edval ueoft henot er ece i v edbyt heendor serf r om t heendor se e.I ti scomput edasf ol l ows: Ne tpr oce eds( NP)=Mat ur i t yVal uemi nusDi scount( MV–D) *Di sc ount–amountofi nt er es tdeduc t edbyt hebanki nadv ance Di sc ount( D)=Mat ur i t yVal uexDi sc ountRat exDi scountPer i od ( MVxDR xDP) *Di sc ountRat e–r at euse dbyt hebanki ncomput i ngt hedi scount .I fnodi sc ountr at e i sgi ven,i ti ss af et oassumet hati ti sequalt ot hei nt e r es tr at e *Di sc ountPe r i od-per i odoft i mef r om dat eofdi scount i ngt omat ur i t ydat e.Si mpl y comput ed,di scountper i odequal st er m ofnot emi nusexpi r edpor t i onupt ot hedat eof di s count i ng.I ti st heunexpi r edt er m oft henot e St epsi nDi scount i ngNot esRecei v abl e 1.De t er mi net heMat ur i t yVal ue( MV)oft henot e 2.De t er mi net heDi sc ountPe r i od( DP) 3.Comput et heDi scount( D) 4.De t er mi nef ort heNetPr oc ee ds( NP) 5.De t er mi newhe t hert her ei sGai norLossonDi scount i ng 6.Re cor dal lt heact i vi t i esr el at edt ot heNot es Pr of or maent r i esf orNetPr oce eds -I fNe tPr oce edsar el essthant hef aceval uepl usac cr uedi nt e r es t( i nt er este ar nedf r om dat eofno t et odat eofdi sc ount i ng) ,t her ei sal ossondi scount i ngofnot e s Cash xxx LossonDi scount i ngofNot es xxx Not e sRece i vabl eDi scount e d I nt er estRecei v abl e( I ncome)

xxx xxx

-I fNe tPr oce edsar emor et hant hef acev al uepl usaccr uedi nt er est( i nt er estear ned f r om dat eofnot et odat eofdi sc ount i ng) ,t her ei sagai nondi scount i ngofnot es Cash

xxx Not e sRece i vabl eDi scount e d I nt er estRecei v abl e( I ncome) Gai nonDi scount i ngofNot es

xxx xxx xxx

I l l us t r at i veExampl e -OnJul y1,2004,Gi l l i queGar ment sSt or er ec ei vedaP150, 000s i mpl ei nt e r es tnot ef or 5mont hsat12% si mpl ei nt er e stf r om Ge l l yAs unci onCr ossSt i t cht or epl acei t s account sr ec ei vabl e .Af t er3mont hs,Gi l l i queneededcashsoi tdi scount edt henot eat BancodeAngel l yMe ndozaatadi scountr at eof14%. *St ep1–Det er mi neMat ur i t yVal ue( MV) MV MV MV MV

=Pr i nci palpl usI nt er es t( P+I ) =P150, 000+( P150, 000x12% x5/12) =P150000+P7, 500 =P157, 500

*St ep2–Det er mi net heDi scountPer i od( DP) Theune xpi r edt er m oft henot ei st hedi sc ountperi od.Thedi scountpe ri odi nt he exampl ei s2mont hs–5mont hsl ess3mont hst hathadl aps ed *St ep3–Comput et heDi scount( D) D D D

=Mat ur i t yVal uexDi scountRat exDi scountPer i od =P157, 500x14% x2/12 =P3, 675

*St ep4–De t ermi nef ort heNe tPr oceeds( NP) NP NP NP

=Mat ur i t yVal uemi nusDi scount( MV –D) =P157, 500–P3, 675 =P153, 825

*St ep5–Det er mi newhet hert her ei sGai norLossonDi scount i ng FaceVal ueoft heNot e Add:Acc r ue dI nt er es t Tot al Less:NetPr oceeds LossonDi scount i ng

=P150, 000 4, 500( P150, 000x12% x3/12) 154, 500 ( 153, 825) P 675* *

* *Ther ei sl ossondi sc ount i ngbecauseNetPr oce edsi sl es st hanFaceVal ue+Ac cr ued I nt er e st *St ep6–Rec or dal lt heact i vi t i esr el at edt ot heNot es Jul1 Not esRec ei vabl e Account sRece i vabl e Oc t1 I nt er es tRecei vabl e I nt er es tI ncome Cash LossonDi scount i ngofNot es Not e sRecei vabl eDi scount ed* * I nt er es tRec ei vabl e Dec1 Not esRece i vabl eDi scount ed Not e sRecei vabl e

P150, 000 P150, 000 4, 500 4, 500 153, 825 675 150, 000 4, 500 150, 000

* *Thecr edi tt oNot e sRe cei v abl eDi scount edaccountmeanst hatt henot ewas di s count edwi t hr ec our se.

150, 000

DI SCOUNTI NG OWN NOTE -I nt hepr e vi ousdi sc uss i on,t hemake roft henot edi scount edi sacust omer ;t hepar t y di s count i ngi st hepayeeandamer eendor se randt her ef or eonl yaper sonsecondari l y l i abl e. -Whe r et henot edi sc ount edi smadebyt hepar t ydi sc ount i ng,apr i mar yl i abi l i t y exi st s.I neffe ct ,t hepart ydi s count i ngi sent er i ngi nt oacont r actofl oanwi t ht he endor se e. I l l us t r at i veExampl e ABC Companydi s count edatt hebanki t sownnot eofP500, 000at12% f oroneyearon Sept ember1,2009.Thee nt ryt or ec or dt hedi sc ount i ngi sasf ol l ows: Cash Di sc ountonNot ePay abl e Not e sPayabl e–Bank Comput at i on: FaceVal ueoft heNot e Less:Di scount( 500, 000x12%) Ne tPr oce eds

P440, 000 60, 000 P500, 000

P500, 000 ( 60, 000) P440, 000

OnDec ember31,2002,t heDi sc ountonNot e sPayabl ei samor t i z edasi nt er est expens ef or4mont hs( Sept embe rt oDecember )asf ol l ows: I nt er e stExpense( 60, 000x4/12) Di scountonNot ePay abl e

P20, 000 P20, 000

I .SAMPLE EXERCI SES–DI SCOUNTI NG OFNOTESRECEI VABLE 1.De t er mi nat i onofI nt er es tandMat ur i t yDat e( us e360daysf ori nt er e st )

A B C D E

Dat eofNot e Augus t5 May10 Oct obe r20 Jul y6 Sept ember15

Pr i nc i pal P60, 000 84, 000 120, 000 45, 000 90, 000

Rat e 12% 16% 18% 14% 17%

Ter m 80days 90days 45days 60days 75days

Mat ur i t y Dat e

I nt er e s t

2.De t er mi nat i onofI nt er es tandMat ur i t yVal ue( use360day sf ori nt er e st )

A B C D E

Pr i nc i pal P540, 000 337, 500 1, 250, 000 910, 000 750, 000

Rat e 11. 9% 8. 4% 12. 5% 9. 25% 14%

Ter m 2y ear s 10mont hs 5mont hs 2. 5ye ar s 45day s

I nt er e s t

Mat ur i t y Val ue

3.De t er mi nat i onofMat ur i t yDat eandVal ue ,Di s countPe r i od,Ne tPr ocee dsandGai norLos son Di s count i ng( us e360daysf ori nt er es t )

A B C D E

A B C D E

Fac eVal ue I nt er e stRat e P40, 000 10. 4% 55, 000 13. 5% 25, 000 12% 8, 500 13. 5% 15, 000 15% Dat eof Di s count i ng Jan19 Jul y22 Apr15 Se p3 Jul y9

Ne tPr oceeds

Di s count Pe r i od

Dat eof Not e De c.12 June17 Mar4 June7 May13

Di s count Rat e 15% 13. 7% 13% 16. 5% 17%

Fac eVal ue

Ter m 50days 69days 70days 125day s 80days

Di scount

Ac cr ued I nt er es t

Tot al

I I .SAMPLE EXERCI SE –DI SCOUNTI NG OWN NOTE

A B C D E

Di s count Rat e 12% 10. 5% 7. 5% 4% 15%

Di sc ount

Mat ur i t y Val ue

Ne tPr oceeds

A B C D E

Fac eVal ue P100, 000 150, 000 60, 000 80, 000 200, 000

Mat ur i t y Dat e

Ne tPr oceeds

Gai norLos son Di s count i ng

Pr epar edf orr e f e r enc epur pose sby:Mr .JohnJeffer yVi l l anuev a...