Step 1: Calculate the Discount on the Note = Discount Face x Discount Rate x Time Period Step 2: Calculate the Cash Proceeds Received on the Note Proceeds Face - Discount ($7,500-225= $7,275) 1 2 3 (Discount Rate = the interest the bank is charging on the note) ($7,500 x 12% x 90/360 = $225) Example: Step 3: Record the liability resulting from the note and the cash received Date Description 1 2 = Step 4: Record Payment when the note matures Date Description Post ref Post ref $375/$10,000 x 360/90= 15% $375/$9,625 x 360/90= 15.6% Debit Debit Credit Credit 1 2 3 1 2 Question: Would you rather borrow $10,000 by issuing a 90 day 15% note or a 90 day non-interest bearing note discounted at 15%? Interest cost either way is $375 BUT with a non-interest bearing note you only receive $9,625 at the beginning.

Step 1: Calculate the Discount on the Note Discount = Face Discount Rate Time Period (Discount Rate = the interest the bank is charging on the note) ($7,50012%90/360=$225) Step 2: Calculate the Cash Proceeds Received on the Note Example:Proceeds=FaceDisco($7,500225=$7,275) Step 3: Record the liabilitv resulting from the note and the cash reseived Question: Would you rather borrow $10,000 by issuing a 90 day 15% note or a 90 day non-interest bearing note discounted at 15% ? Interest cost either way is $375 BUT with a non-interest bearing note you only receive $9,625 at the beginning