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A company issues a 60-day, 12% discounted note payable with a face amount of $1,000 (360-day year). How much cash does the borrower receive on the issue date?
A$1,000
B$1,020
C$960
D$980
Answer & Solution
Correct answer: D. $980
1. For a discounted note, interest is deducted up front.
2. Interest: \$1{,}000 \times 12\% \times \frac{60}{360} = \$20.
3. Cash received: face minus interest = \$1{,}000 - \$20 = \$980.
4. The issue entry debits Cash $980 and Interest Expense $20, crediting Note Payable $1,000.
5. Option A is what an interest-bearing note would yield; this note is discounted.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §5.3 "Notes Payable", p.216_
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