On August 1, 2010, Colombo Co.s treasurer signed a note promising to pay $240,000 on December 31,

Question:

On August 1, 2010, Colombo Co.’s treasurer signed a note promising to pay $240,000 on December 31, 2010. The proceeds of the note were $232,000.

Required:

a. Calculate the discount rate used by the lender.

b. Calculate the effective interest rate (APR) on the loan.

c. Use the horizontal model (or write the journal entry) to show the effects of

1. Signing the note and the receipt of the cash proceeds on August 1, 2010.

2. Recording interest expense for the month of September.

3. Repaying the note on December 31, 2010.

Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...